Curated Insights 2018.07.13

Confessions of a digital dinosaur: Esports is the next great traditional sport

Esports is becoming the next great traditional sport because more young people are regularly playing and watching them than any other sport. For young people esports has a tremendous first-mover advantage of being the first digitally native sport.

Matt Kim, an esports reporter offers an interesting perspective. He grew up in Seoul, South Korea where the national sport is esports. “By the time I left South Korea, StarCraft was a dominant pop culture fixture in ways I don’t think a lot of people really understand. It wasn’t just because South Korea was paying professional gamers years before anyone else, or that competitions were broadcast on major television networks. In South Korea, StarCraft was literally everywhere, from branding on clothes to labels on food. It was in everyday conversations with classmates. Posters were plastered across city windows of seemingly infinite PC bangs – cafes where players pay by the hour. Now I’m seeing esports (in the U.S.) in mid-construction where it’s my job to report on its progress. Yet it feels like I’ve already seen the ending, and now I get to witness its engineering in reverse.”

1.2 billion hours were watched of the League of Legends Championships. More than 80 million unique viewers watched one match alone. By comparison, 76 million watched the final episode of Seinfeld, the Super Bowl of traditional television. If this is hard to get your head around, imagine how advertisers are trying to chew on this exponential opportunity while some of their traditional platforms are being spit out with declining viewership.

The video game online streaming audience is more than five times greater than Netflix subscribers, and Twitch dominates this market. According to Cerulli, the average age of a wealth manager is 51. I wonder how many have even heard of Twitch. Twitch is home to more than 2 million broadcasts a month shown to more than 15 million unique daily viewers. Their audience watched 355 billion minutes of Twitch last year. More than 150,000 streamers – the people providing the content – are getting paid from the Twitch platform alone. The total number of creators earning money more than tripled year over year. All with enough left over for Twitch to raise more than $30 million for charities. The revenue side has explosive scale while the cost per broadcast has to be even more enticing to future creators. I met a broadcaster on Twitch who needed a cheap webcam and comfortable chair. Compare that to an itemized cost to produce an average football game on television I found.

Even the cutting edge seems too crowded to one of my favorite thinkers – Daryl Morey, the General Manager of the Houston Rockets – who likes to be even earlier. He has completely revolutionized my favorite game of basketball. But, he’s not done. He now compares the growth opportunity of esports to 1950s basketball. Morey explains, “I say it all the time because it’s true: The three dominant sports in the future are going to be soccer, basketball and esports.”

“I believe esports will rival the biggest traditional sports leagues in terms of future opportunities, and between advertising, ticket sales, licensing, sponsorships and merchandising, there are tremendous growth areas for this nascent industry.” That comes from Steve Borenstein, Chairman of Activision’s esports division, who is the former CEO of ESPN and the NFL Network.

How Amazon steers shoppers to its own products

Amazon’s move into the private label retail space started small and quiet. As the article says, “It started with a simple battery.” Now, AmazonBasics batteries account for a third of online battery sales. To stay competitive, brands like Energizer are paying to advertise at the top of relevant search results. While AmazonBasics only has about 100 products, the room for growth is large, and they have the data to see what products to take private next. “About 70 percent of the word searches done on Amazon’s search browser are for generic goods. That means consumers are typing in “men’s underwear” or “running shoes” rather than asking, specifically, for Hanes or Nike.”


What an Amazon Pharmacy could solve, and what it won’t

In the future, patients could log into their Amazon accounts to track their prescription history, helping them better track their own health care. The company could also offer something like the “you might also like” recommendation engine, but more based on science than browsing history. A patient might indicate he has coronary heart disease and high cholesterol, for example. Amazon would also have data on the patient’s meds, and could recommend alternative treatments. Or Amazon might inform doctors that similar patients are getting a higher dose of the same drug.

Amazon would also have the capacity to collect data on side effects. Clinical trials are not big enough or run over a long enough time period to catch the less common side effects. Those tend to be identified after drugs go on the market and are widely used. But they might be identified faster if patients reported side effects the same way they write reviews of products. Not all reported complaints will be attributable to the drugs, but with enough data, patterns would emerge.

Netflix is a product & technology company (Netflix misunderstandings, pt. 2)

There’s a pernicious and persistent narrative about Netflix where the company’s success is overwhelmingly attributed to the mistakes of its suppliers. Not only did these suppliers (a group that included nearly every major media company) continually sell the most valuable rights to their most valuable content to Netflix, they massively underpriced these deals. As such, the streaming upstart was able to (1) access large volumes of high quality content at a time when it had none of its own; (2) build a business atop the creative successes of its eventual competitors; and (3) benefit from years of relatively uncontested OTT leadership. Hence success!

The prioritization of engagement time over quality is controversial, but there are a few explanations. To start, one has to assume Netflix is correct in observing that, at least in the short-run, watch time has a (much) stronger impact on retention than quality (and of course, the former is a more objective, quantifiable and analyzable metric). This relationship likely stems from the unique dynamics of an unbundled, D2C subscription content service.

This view considers content as fundamentally substitutable – because it’s not an experience being bought (or sold), it’s time. Quality is expressed through viewing volume and, as with most substitutable goods, pricing efficiency is paramount. If the average title generates 100 hours per dollar, then a title that generates only 80 hours costs Netflix 25% of potential viewing hours and thus avoidable subscriber losses and realizable subscriber gains. This dynamic is further bolstered by the role of cost amortization. The decision to make The Crown is an expensive one irrespective of the number of hours produced; set building, costume design, casting, scoring and location scouting are upfront, fixed costs, largely independent of episode count. As such, a 10-episode season typically won’t cost 11% more than a nine-episode one. Given the likelihood that a viewer would watch ten episodes rather than nine if given the choice, elongation drives both net engagement and efficiency gains. And that’s just in adding one episode.

To that same end, Netflix’s obsession with engagement may change as OTT video grows from its infancy into a more competitive puberty. As Netflix edges towards domestic saturation, its revenue growth will primarily be driven by price increases – and a reputation for overlong series and B-grade movies may prove problematic regardless of watch time growth (HBO’s price, after all, is 37% higher despite offering a fraction of the library and achieving even less engagement per customer). In addition, the competition in OTT video is only getting stronger. As new entrants attack the space with different priorities, or higher quality thresholds, Netflix will need to respond. Product will not be enough.


Netflix isn’t being reckless, it’s just playing a game no one else dares (Netflix misunderstandings, pt. 3)

Netflix’s goal is to have more subscribers than any other video service in the world, and to be the primary source of video content for each of these subscribers. The company doesn’t want to be a leader in video, or even the leader in video – it wants to monopolize the consumption of video; to become TV. This ambition has several important consequences, especially relating to the company’s spend.

Online distribution encourages audiences to concentrate their watching time and enables networks to monopolize their viewers’ attention. Much of this comes from the fact that unlike pay TV, most online video subscriptions are sold a la carte and on a month-to-month basis. This has four major implications. First, it’s harder for viewers to discover competing networks or sample their content, as they’re no longer a channel change away. Second, it’s harder for any network to acquire new paying customers, as this requires each would-be subscriber to first decide they’re willing to spend more money each month, then go through the process of signing-up. And even when a paid customer is acquired, retention is a challenge. A few great shows each year isn’t enough to sustain 12 straight months of paid subscriptions and avoid “binge-and-churn” subscriber behavior. Fourth, the viewer experience of managing multiple streaming networks is rough. Unlike pay TV, which bundles all channels onto a single output with a consistent UI and centralized guides, OTT video requires audiences to contend with multiple apps, with different watchlists and interfaces (e.g. some have individual user profiles others don’t; some boast great UIs, others are horrid), not to mention variable definitions of reliability and streaming quality. On top of this, internet-enabled personalization and on-demand distribution allows a digital network to be all things to all people at all times – no longer are dozens of channels needed to satisfy the various interests of a single zip code. And finally, digital networks are free to air any content at any time – and as such, any consumption lubricates additional consumption and prevents consumption of a competitor.

Netflix’s goal is to functionally replace the entire bundle– to have so much content that customers don’t need another general entertainment aggregator, be it Hulu or DirecTV Now. Audiences would still have a few focused carve outs, such as HBO, ESPN or Disney, but rather than enlisting for Discovery + AMC + ABC + Nickelodeon + Showtime etc., the average household would just need Netflix. Not only does the company benefit from a virtuous cycle in pursuit of this goal, this would save the average household hundreds of dollars per year even if Netflix doubled or tripled its monthly fee. This end-state might seem ambitious, but that’s why Netflix’s spend is both substantial and aggressive – the goal isn’t just satisfying current subscribers, it’s to replace almost all its competitors.


Netflix and the rise of global scale media (or how media learned to love its customers)

Two important results of this has been the ability to raise its prices 3 times in the past 4 years without materially impacting its long-term growth rate, demonstrating just how much consumer surplus it provides the customer relative to the value it captures via pricing, while also bringing down its churn rate over time, demonstrating increasing customer satisfaction with its service. The large value gap also means that Netflix has additional pricing power in the future it can take to improve its margins.

Netflix has also created the capability to source content globally (sometimes required by regulation in certain locales) and redistributing it to subscribers in foreign geographies that would never have sought it out for lack of awareness. This data driven targeting/marketing capability uniquely provides Netflix’s the capability to drive viewer demand for its content investments across a global audience (increasing scale of demand) while increasing both the pool of its content supply (lowering overall cost) while better pricing the value of each piece of content pays.

JOHN MALONE: It’s way too late… So, you know, his scale, the ability to create content to scale. I mean, if you think about it, three years ago, HBO was the biggest, most powerful thing in the– in the– premium entertainment category. They spent I think two and– $2 billion to $2.5 billion on content. They’re now dwarfed. And beside that, HBO is essentially only a domestic distributor. So they don’t have the global platform under them. And, while they can syndicate or sell their content to foreign distributors, it– it– it is not nearly as strong a business model as being able to know the customer, deliver the stuff directly, and control the pricing at which your product is delivered. So– and having all the information about the consumer and their habits– which in Reed’s case, he’s not using for advertising at this point, but he certainly can use that to optimize his programming. So I– I think he’s done a brilliant job of– of building that business. Scale is– is very, very powerful when you’re producing something that has a high fixed and very low variable cost. So when you get to a point where your marginal cost is $0, profitability is enormous as you scale up.”

China’s risqué live-streaming apps are now objectifying men too

Live-streaming is expected to nearly double from this year to 126.8 billion yuan ($19 billion) in China by 2022, according to a research report from internet consultant IResearch. YY and Momo both take about 60 percent of the cut of tips that live-streamers make.

Already, YY has lifted the revenue contribution from female users by 10 percentage points to about 40 percent this year from when it first started the business, Li said. On Momo, women account for only about 25 percent of users and men remain the main source of tipping. Yet the company is working to create services that will make female users more open to using its platform including women-oriented gaming, cosmetics and fashion channels, according to Jia Wei, vice president of Momo and general manager of live-streaming.

JD.com estimates that women’s spending power will reach 4.5 trillion yuan ($676 billion) in China by 2019.

Can live streaming make money? Takeaways from Huya’s May IPO

According to an earlier PricewaterhouseCoopers report on trends in the sector, China and the Asia-Pacific region are becoming the largest consumer markets for online gaming and will maintain a steady compound annual growth rate (13.9%), with total revenue for the sector reaching US$195 million by 2021. Looking at the driving force behind this propulsion in value, PricewaterhouseCoopers predicts that by 2021, the value of advertising from live stream media will reach US$84 million, and events revenue will reach US$54 million. Player fees alone will net US$31 million. Ultimately, the rise of eSports in China is related to the booming video game market. In 2016, the Chinese video game sector was worth US$15.4 billion. By 2021, it is expected to challenge today’s largest market, the US, for first place, with expected revenues of $26.2 billion.


Activision is ‘best positioned’ for the coming billion-dollar eSports bonanza

eSports are expected to generate direct revenue of over $900 million this year and cross the $1 billion threshold in 2019, Post said. But those figures may just be scratching the surface. Over time, and using a traditional sports analogy, we believe eSports advertising (streaming, sponsorship), ticket sales, promotions, and merchandise sales could reach $15 billion.

Intel acquires eASIC to take its chipsets deeper into IoT and other future technologies

“We’re seeing the largest adoption of FPGA ever because of explosion of data and cloud services, and we think this will give us a lot of differentiation versus the likes of Xilinx,” which is one of Intel’s biggest competitors in FPGA. “We’ll be able to offer an end-to-end lifecycle that fits today’s changing workloads and infrastructure. No one on the marketplace will have this.” FPGA designs allow companies to quickly modify chip architectures, but they also require a lot of power. eASIC chips are more efficient, and they can be configured quickly from the outset (but cannot be modified).


Morningstar targets slice of $19tn market with in-house funds

The group’s highly-prized industry ratings system is influential in determining the fate of fund management companies. A poor rating, or negative report from an analyst, can often trigger sharp outflows, while top-rated funds draw huge inflows.

Morningstar said its mutual funds would not be qualitatively rated by its own analysts but they would be eligible for an in-house algorithmically-assigned star rating after a three-year performance record, at which time they would become a client of the group’s research arm.

Having started life as a boutique research provider that compiled data on 400 mutual funds three decades ago, Morningstar has become a powerhouse of the asset management industry, employing 5,000 staff, overseeing more than $200bn of assets and publishing data on 233,000 mutual funds.

Harvard study: Heat slows down the brain by 13%

The study has socioeconomic findings, too: if you’re too poor to afford air-conditioning you might fall behind at work or at school. In fact, studies are proving this repeatedly.

America, by and large, has an obsession with A/C… 87% of American homes have A/C. There are currently 1.6 billion A/C units in the world, and that figure is expected to be five times greater by 2050 as climate change takes its toll.

Curated Insights 2018.07.06

What would happen if China started selling off its Treasury portfolio?

And the perennial threat that China would sell its Treasuries. That could happen as a byproduct of a decision by China to push its currency down—if China signals that it wants a weaker currency, the market would sell yuan for dollars, and controlling the pace of depreciation would require that China sell reserves. Or could happen even if China maintained its current basket peg and shifted its portfolio around—selling Treasury notes for bills, or selling Treasuries and buying (gulp) Bunds (if it can find them—it might end up buying French bonds instead) or JGBs.

If Treasury sales came in the context of a decision by China that it wanted a weaker currency to offset the economic impact of Trump’s tariffs (or simply a decision by the PBOC that it needed to loosen monetary policy in response to a slowing Chinese economy, and thus to no longer follow the Fed), the disinflationary impulse from a weaker yuan (and a broader fall in most Asian currencies and a rise in the dollar) would likely be more powerful than the mechanical impact of Treasury sales. That is the lesson of 2015-16.

Treasuries sales in a sense are easy to counter, as the Fed is very comfortable buying and selling Treasuries for its own account. I have often said that the U.S. ultimately holds the high cards here: the Fed is the one actor in the world that can buy more than China can ever sell.

Who has the best business model (and it’s not Google or Facebook)

Staying on the topic of streaming video, this is a relevant example of how shared-value transactions gives Amazon a potential structural advantage over the leader in the space: Netflix. Success in streaming video requires great video content, and Netflix will spend $8 billion this year buying video rights. The way Netflix funds this hefty content bill is that they have 120 million customers who pay them $10 each month directly, and then they take half of that fee collected from every subscriber and spend it on content. So every subscriber pays for content equally (about $5 per user per month) as Netflix earns the exact same amount from their best users as their worst users.

Amazon too will spend a significant sum buying video content (about $5 billion this year). But their content bill is paid entirely differently. Instead of only depending on a percentage of Prime membership fees (which are the same for every user) to fund their content budget, Amazon can pay for content using revenue from purchases of books, diapers, toilet paper, laundry detergent, and more (and this spend is most definitely not the same for every user). As Bezos has said: “When we win a Golden Globe, it helps us sell more shoes”. Amazon’s best users are able to purchase significantly more goods than their average user, and these funds can be indirectly applied to fund video content that everyone shares value from.


Dropbox vs. Box: The story of enterprise SaaS multiples

By digging deeper into the operating margins, we find that the difference between the two companies seems to come down to the approaches of their growth strategies. Dropbox has grown primarily through a highly efficient marketing function and self-serve model, while Box has grown through a traditional, and more expensive, enterprise sales model.

This story hides some major issues with Dropbox. Their strategy for years has been to go after the consumer cloud storage market, which never made sense, as that market is highly competitive and has limited revenue potential. Box decided long ago to pivot to the enterprise, while Dropbox went through numerous failed acquisitions and internal initiatives, attempting to build products in everything from email to payments. They built a strong consumer brand in the process but ultimately decided to double down on enterprise. We think it’s too late.

The cloud storage and file hosting industry, including all the related services, doesn’t seem to be protected by a particularly wide moat. All of the major technology names are active in this field as well, including Amazon, Google, Microsoft, and Apple. All of these companies have the added advantage of pre-existing customer relationships. The main advantage Dropbox would need is the ability to provide differentiated services to enterprises. However, we haven’t seen evidence of Dropbox’s ability to effectively build differentiated enterprise products. As they are forced to expand their market, we believe they will face stiff competition that will make it more difficult to grow. On the other hand, the 500 million users may be the key to unlocking growth within enterprises that enterprise sales teams couldn’t effectively crack.

The Airbnb challenger you’ve never heard of (by name)

Airbnb has reportedly spent only $300 million on marketing since its inception in 2008. “We don’t acquire customers by buying them. We acquire customers by providing a superior experience and having offerings around the world,” a spokesperson emailed.

Booking spent $4.5 billion on marketing last year alone. Yet Fogel admits that it still lags in consumer awareness. The brand is much better known in Europe, where it was founded. “The product is just as good here as anywhere else … and therefore we should have much more [awareness],” he says, noting that Booking.com only came to the US in 2013. Booking Holdings’ other brands, like Priceline and Kayak, have loyal bases of users, Fogel says. But Booking.com makes up the vast majority of the company’s revenue, and the name change from Priceline to Booking Holdings shows what executives consider their crown jewel.

Airbnb is fighting back with two high-end tiers of hotel-like offerings and luxury accommodations, Airbnb Plus and Beyond by Airbnb. The company emphasizes that 3.5 million of its listings are exclusive and that business travel now makes up 15 percent of its bookings. Beyond that, Airbnb has been selling tourist activities to its customers through its Experiences product for two years.


A $6 billion China startup wants to be the Amazon of health care

WeDoctor’s data comes from several sources, but one of the most important is the hundreds of hospitals in its network whose doctors plug information into a central database — with consent from patients who may want to switch care-givers. They could also upload their own records. The company then profiles users, classifying them in buckets based on age, gender, region or symptoms. That’s a potent advertising aid to drugmakers and insurers, Chen says. That leeway to commercialize patient information comes with caveats: WeDoctor stresses data is anonymous and it doesn’t share it with third parties.

That’s just one piece of the money-making puzzle. WeDoctor also takes a cut on consultation fees via its app or smart speaker. The 4,000 yuan box has a screen in the front and comes with a year’s access to doctors online.

Those clinics complement “online hospitals.” WeDoctor’s won licenses to operate 10 such platforms that offer real-time chats with doctors. This also lets the best clinicians, usually working out of big hospitals that keep fees artificially low, to earn more on the side. Top doctors can demand 3,000 yuan per session, WeDoctor says.

WeChat Impact Report 2018 shows impressive social impact

WeChat-driven information consumption reached RMB 209. 7 billion
WeChat accounted for 34% of the total data traffic of users
WeChat drove RMB 333.9 billion traditional consumption, covering travel, food, shopping, tourism, etc.
WeChat contributed the employment of 20.3 million persons in 2017, more than twice the 2014 figure
The number of stores accepting WeChat Payment in Japan was multiplied by 35 in 2017

China isn’t playing tech catch up – it’s leapfrog and it may get dirty

According to business managers, many of those three million annual science and technology graduates lack crucial analytical and communication skills, and are barely employable. Similarly, a large proportion of those 430,000 research papers have little or no scientific value. And many of China’s 1.4 million yearly patent applications are destined to prove worthless. In fact, fewer than 20 per cent of China’s applications even claim to be for new inventions; the vast majority are for lower-tier design or utility model patents, which typically cover minor incremental changes to existing products.

Inventive economies generate handsome international income streams by licensing their technologies to foreign companies, which then pay them intellectual property royalties. In 2016, China earned just US$1 billion from the rest of the world in intellectual property payments. In contrast it paid out US$24 billion (and according to many critics, it should have paid a great deal more). Now compare those numbers with the equivalent figures for the US, which last year earned US$128 billion from licensing its intellectual property to other countries, while paying out US$48 billion. Meanwhile, Japan earned US$35 billion, and paid out US$18 billion.

The thought father: Nobel Prize-winning psychologist Daniel Kahneman on luck

One of the most amusing episodes in the book comes when Kahneman visits a Wall Street investment firm. After analysing their reports, he calculated that the traders, who were highly prized for their ability to “read” the markets, performed no better than they would have done if they made their decisions at random. The bonuses that they received were, therefore, rewards for luck, even though they found ways of interpreting it as skill. “They were really quite angry when I told them that,” he laughs. “But the evidence is unequivocal — there is a great deal more luck than skill involved in the achievements of people getting very rich.”


Better ways to learn

“When you are cramming for a test, you are holding that information in your head for a limited amount of time,” Mr. Carey says. “But you haven’t signaled to the brain in a strong way that’s it’s really valuable.”

One way to signal to the brain that information is important is to talk about it. Ask a young student to play “teacher” based on the information they have studied. Self-testing and writing down information on flashcards also reinforces learning.

“Sleep is the finisher on learning,” Mr. Carey says. “The brain is ready to process and categorize and solidify what you’ve been studying. Once you get tired, your brain is saying it’s had enough.”

Curated Insights 2018.06.29

75% of bull markets are nothing but multiple expansion

Hedge funds’ best ideas? Those are just stocks they’re dumping

“This suggests that the pitched stocks were their ‘best ideas’ but not likely any longer. Returns of pitched stocks diverged from market immediately after the pitches—long pitches spike up and short pitches spike down. These results suggest that these investment conferences are closely followed by other investors and have high market impacts. The majority of the outperformance occurs before the pitches. Outperformance after the pitches are likely driven by inflows from other investors that follow these investment conferences.”

Amazon’s scale in Japan challenges rivals and regulators

In the wake of Amazon’s rise, Rakuten, its largest Japanese rival, which operates the country’s biggest online marketplace, has expanded aggressively into financial technology, mobile phones and home-sharing. Still, to compete better against Amazon, the company is aiming to create its own logistics and delivery network within two years. Unlike its US rival, it had left warehouse and inventory management to the retailers that use its marketplace rather than building its own proprietary systems.

Amazon held a 23 per cent share in Japan’s internet retail market compared with Rakuten’s 18.5 per cent share last year, after overtaking its Japanese rival in 2016, according to Euromonitor. Other industry data shows the two rivals in a tight race.

“There is no way rivals can compete against Amazon. They invest in the best-in-class technology with little regard for profits so that they can create a sophisticated logistics operation,” said Shinichiro Nishino, a former Amazon executive who was hired by Mr Bezos to launch the business in Japan.


Amazon wants the whole package in delivery

Amazon plans to provide entrepreneurs known as “Delivery Service Partners” with guaranteed delivery volume, use of Amazon’s logistics technology, and discounts on Amazon-branded delivery van leases, vehicle insurance, Amazon uniforms, and even fuel. The company envisions hundreds of owners operating fleets of 20 to 40 vehicles and eventually having “tens of thousands of delivery drivers across the U.S.,” Amazon trumpeted in its press release.

The independent contractor owner-operator model is similar to how FedEx handles its last-mile deliveries, while UPS delivery trucks are staffed by unionized employees, Blackledge writes. Amazon has been steadily encroaching on all parts of the traditional delivery firms’ turf in recent years, with initiatives including a delivery service for small businesses, building its own air cargo hub, and even expanding into ocean freight shipping. Amazon already boasts a fleet of 7,500 trucks, 35 aircraft, and over 70 delivery centers. This pales in comparison, however, to FedEx’s stated world-wide armada of 650 planes, 150,000 delivery trucks, 400,000 employees, and 4,800 fulfillment facilities.

Danny Meyer’s recipe for success

Rather than rolling out replicas of USC in other cities, as is a common tactic for ambitious restaurant empire builders, Meyer employed a different strategy. Sticking close to home, Meyer expanded by replicating his enlightened hospitality, cultivating regulars, and stimulating buzz by endowing each new restaurant with its own memorable menu and décor.

“The fact that Danny has been so successful translating the culture across so many different restaurant brands, and engaging a lot of people to help him, is key to understanding the quality and influence of the culture he inspired. He happens to be in the restaurant business, but if he had been a university president, you would have a different kind of college. When he looks at you, he sees you. He’s not playing the role of an executive. He’s a hugger. He trusts his gut, and his gut is always working.”

Meyer never set out to be a business mogul. He simply wanted to create a homey, unpretentious, and affordable Michelin star–quality restaurant that did not exist in New York in the 1980s. Unlike the dominant, ultra-expensive, and exclusive French haute cuisine establishments, such as Le Pavillon and Lutèce, which oozed effeteness, Meyer wanted USC customers to feel comfortable asking their server, or even the sommelier, to explain and pronounce menu items. He wanted people walking in without a reservation to feel welcome ordering a full-course meal at the bar.

Stewarding the culture in association with every business decision is the main responsibility and passion for Meyer, who recently turned 60, and is not slowing down. Also on his agenda? Creating a few more fine casual brands, such as Shake Shack and Tender Greens, and making them all as essential to millennials as McDonald’s once was to boomers.

All the questions you wanted answered about Bird Scooters and their recent $300 million funding

Capital. Because Bird was first to market, extremely innovative, quick to hire talented leadership and an experienced founder it was able to raise $125 million in an extraordinarily short period of time. That has allowed the company to launch in many markets, build amazing applications, design future versions of the scooter and monetize while many companies are still just drawing up their go-to-market plans. This allowed Bird to then raise $300 million from some of the top VCs in the country. Capital of course drives scale advantages and when you have “winner take most” markets it also has a way of scaring away some investors from investing in the 3–5th “me too” competitors. You can expect some strong competition, but it’s unlikely that there will be 5 great scooter companies.

Density. One huge advantage the early-movers have is “density.” A dockless eScooter solution is only compelling if you believe that you’ll always be able to find a scooter in a relatively short walking distance or it defeats the purpose. If Bird has thousands of scooters in a neighborhood (and if it can acquire these scooters at cheaper prices due to scale advantages) then it’s significantly more difficult for new entrants to launch without serious capital and it’s hard to get serious capital from investors who perceive you’re late to the game.

Data. Bird already has an enormous lead in data collection. What appears as just an electric-powered scooter is really a computer with wheels. Between our on-board CPUs and your mobile phone companions we have an enormous amount of data on transportation routes, where riders want to pick up scooters in the morning and where they leave them in the evening. This not only allows Bird to have advantages in right-sizing city inventory levels and proper placement to maximize yield, but the company has already been providing this data to cities to help them better plan their cities of the future. We clearly need a world in which gas cars don’t dominate dense city environments and providing this data to cities is a great start in that direction.

Mechanics. What is even more remarkable than “chargers” is how Bird has build out local teams of mechanics in each market, providing large legions of skilled labor the ability to earn meaningful dollars for repairs to wheels, brakes, cables, batteries, electronics, etc. Local politicians wanting to see local job creation rather than jobs at tech firms all migrating to San Francisco should be heartened. Because each market won’t have unlimited labor suppliers of repair people and because the largest services can pay the best, there is inherent advantage in capturing the early pools of mechanics.


How WeWork’s revenue-sharing leases could affect property investors

Both WeWork and THRE are keeping details of the revenue-sharing lease under wraps but, broadly, it means that WeWork does not have to pay a fixed amount of rent. If it is doing badly and cannot attract tenants, it pays less — or nothing — to its landlords, THRE and PFAE. Conversely, if it does well, it can pay more.

This has implications for property investors. By offering an uneven and potentially volatile income stream in place of a steady and fixed one, a lease of this kind changes the bond-like nature of property as an asset class into something closer to an equity.


The business of death has a bright future in Japan

The funeral business has a bright future in Japan, where deaths have outpaced births every year since 2007. Almost 30 percent of the population is 65 or older. And this year is a tipping-point of sorts. After 2018, the number of Japanese women of child-bearing age will decline so sharply that by 2025 the population is forecast to drop by four million people, equivalent to the population of Los Angeles.

Trump tariffs would be bad for the entire global auto industry, says Moody’s

Daimler AG, BMW and Volkswagen AG all import more than half the vehicles they sell in the U.S. from other countries. The breakdown is 50% for Daimler, 70% for BMW and above 80% for VW. “However, these imports represent only about 12% of BMW’s total annual unit sales, about 8% of Daimler’s global light vehicle sales, and around 3% of VW group sales (figures include sales from Chinese joint ventures),” said Clark. “On the other hand, BMW and Daimler export more than half the vehicles they produce at their U.S. assembly plants. Fiat Chrysler Automobiles NV produces about half its vehicles in the U.S., with the remaining units imported mainly from Mexico and Canada.”

Moody’s estimates that Toyota exports roughly 22% of cars produced in Japan to the U.S., while Nissan exports about 31% of its domestic production to the U.S. market. Honda has the most diversified production of the three and a low ratio of exports to the U.S. but is planning to increase exports in 2018. Korean car makers Hyundai Motor Co. and Kia Motors Corp. import a bit more than half their vehicles sold in the U.S., mostly from Korea but also from Mexico. Both were planning to produce more SUVs and crossovers in the U.S. in the next two years.

Mexico would be hurt more than other markets as many big car makers have assembly plants there to serve the U.S. market. Mexico produced 3.8 million vehicles in 2017, 82% of which were exported. Of that total, 84% went to the U.S. and Canada. In the first quarter of 2018, the car industry accounted for 2.9% of Mexico’s GDP, meaning tariffs would hurt more than the car manufacturers and auto-parts suppliers.

One group that will be especially hard hit is U.S. car dealers, which rely heavily on imports. “These companies have minimal U.S.-produced vehicle penetration to offset reduced sales from price increases on imported vehicles,” said the report.

Where 3 million electric vehicle batteries will go when they retire

By 2030, there will be a 25-fold surge in battery demand for EVs. Automobiles have overtaken consumer electronics as the biggest users of lithium-ion batteries, according to Paris-based Avicenne Energy. By 2040, more than half of new-car sales and a third of the global fleet –- equal to 559 million vehicles — will be electric. By 2050, companies will have invested about $550 billion in home, industrial and grid-scale battery storage, according to BNEF.

Introducing a16z crypto

Trust is a new software primitive from which other components can be constructed.

The new primitive of trust also means that 3rd-party developers, entrepreneurs, and creators can build on top of crypto-powered platforms without worrying about whether the rules of the game will change later on. In an era in which the internet is increasingly controlled by a handful of large tech incumbents, it’s more important than ever to create the right economic conditions for developers, creators, and entrepreneurs. Trust also enables new kinds of governance where communities collectively make important decisions about how networks evolve, what behaviors are permitted, and how economic benefits are distributed.

Cryptogoods can unlock new experiences and business models for games and other forms of media.


Ten lessons from Michael Batnick’s book ‘Big Mistakes’

Ben Graham understood that no approach works all the time. There are time and place for everything. Markets evolve and some concepts stop working. A margin of safety doesn’t matter during periods of forced liquidation, especially when you are leveraged to the hill.

A high IQ guarantees you nothing! This is one of the hardest things for newer investors to come to grips with, that markets don’t compensate you just for being smart.” and “Intelligence in investing is not absolute; it’s relative. In other words, it doesn’t just matter how smart you are, it matters how smart your competition is.

The most disciplined investors are intimately aware of how they’ll behave in different market environments, so they hold a portfolio that is suited to their personality. They don’t kill themselves trying to build a perfect portfolio because they know that it doesn’t exist.

Curated Insights 2018.06.24

Tails, you win

Correlation Ventures crunched the numbers. Out of 21,000 venture financings from 2004 to 2014, 65% lost money. Two and a half percent of investments made 10x-20x. One percent made more than 20x return. Half a percent – about 100 companies – earned 50x or more. That’s where the majority of the industry’s returns come from. It skews even more as you drill down. There’s been $482 billion of VC funding in the last ten years. The combined value of the ten largest venture-backed companies is $213 billion. So ten venture-backed companies are valued at half the industry’s deployed capital.

The S&P 500 rose 22% in 2017. But a quarter of that return came from 5 companies – Amazon, Apple, Facebook, Boeing, and Microsoft. Ten companies made up 35% of the return. Twenty-three accounted for half the return. Apple alone was responsible for more of the index’s total returns than the bottom 321 companies combined. The S&P 500 gained 108% over the last five years. Twenty-two companies are responsible for half that gain. Ninety-two companies made up three-quarters of the returns. The Nasdaq 100 skews even more. The index gained 32% last year. Five companies made up 51% of that return. Twenty-five companies were responsible for 75% of the overall return.


16 years late, $13B short, but optimistic: Where growth will take the music biz

The primary problem, however, is how the major labels monopolize royalty payments. Spotify and Apple Music take roughly 30% of total revenues (which goes to operating costs, as well as customer sales tax and platform fees), with the remaining 70% paid out in royalties. Out of this remainder, the major labels keep roughly 70%, with 15% going to performers and 15% to composers. And remember, a hot song often boasts a handful of writers and several performers, each of whom will share in the net royalty (Spotify’s most streamed track in 2017, Ed Sheeran’s “Shape of You,” counts six writers; Kanye West’s 2015 hit “All Day” had four performers and 19 credited writers).

A common rejoinder to this argument is that growth in subscriptions will solve the problem – if everyone had Spotify or Apple Music, per-stream rates would remain low, but gross payments would increase substantially. There are three limits to this argument. First, prices would likely need to drop in order to drive additional penetration. In fact, they already are as the major services embrace student pricing and family plans (which cost 50% more but allow four to six unique accounts): Over the past three years, premium user ARPU has fallen from $7.06 per month to $5.25. To this end, family plans exert significant downward pressure on per-stream rates, as the number of streams grows substantially more than revenue. For related reasons, the industry is also unlikely to return to the days where the average American over 13 spent $80-105 a year (1992-2002). Even if every single American household subscribed to Spotify or Apple Music, per capita spend would be around $65-70. This is still more than twice today’s average of $31, but such penetration is unlikely (in 2017, only 80% of American mobiles were smartphones). Put another way, much of the remaining growth in on-demand streaming will come from adding additional users to existing subscriptions. While this increases total revenue per subscription (from $120 to $180), it drops ARPU to at most $90 and its lowest, $20.

Second, growth in on-demand music subscriptions is likely to cannibalize the terrestrial and satellite radio businesses. In 2017, SiriusXM (which has the highest content costs per listener hour in the music industry) paid out $1.2B in US royalties, roughly 33% of that of the major streaming services. US terrestrial broadcast revenue generates another $3B+ in annual royalties. These formats are rarely considered when discussing the health of the music industry, even though one reflects direct consumer spend. But they provide significant income for the creative community (though notably, terrestrial radio royalties compensate only composers, not performers). As on-demand streaming proliferates and cannibalizes more terrestrial/satellite radio listening (still more than half of total audio time in the United States), streaming royalties will continue to grow – but much of this will come at the expense of radio royalties.

Streaming services have an opportunity to cut out labels by forming direct-to-artist deals or establishing their own pseudo-label services. Not only has this long been predicted, it’s been incubated for years. Since 2015, the major services have cultivated exclusive windows and radio shows with major stars, including Beyoncé, Kanye West and Drake. While this construct still went through the label system, it generates clear business cases for further disintermediation.


How Netflix sent the biggest media companies into a frenzy, and why Netflix thinks some are getting it wrong

Hastings has never really feared legacy media, said Neil Rothstein, who worked at Netflix from 2001 to 2012 and eventually ran digital global advertising for the company. That’s because Hastings bought into the fundamental principle of “The Innovator’s Dilemma,” the 1997 business strategy book by Harvard Business School professor Clayton Christensen. “Reed brought 25 or 30 of us together, and we discussed the book,” Rothstein said of an executive retreat he remembered nearly a decade ago. “We studied AOL and Blockbuster as cautionary tales. We knew we had to disrupt, including disrupting ourselves, or someone else would do it.”

BTIG’s Greenfield predicts Netflix will increase its global subscribers from 125 million to 200 million by 2020. Bank of America analyst Nat Schindler estimates Netflix will have 360 million subscribers by 2030. Netflix estimates the total addressable market of subscribers, not including China, could be about 800 million.

Netflix has another edge in the content wars. While networks make decisions on TV ratings, Netflix plays a different game. Its barometer for success is based on how much it spent on a show rather than hoping every show is a blowout hit, said Barry Enderwick, who worked in Netflix’s marketing department from 2001 to 2012 and who was director of global marketing and subscriber acquisition. Since Netflix is not beholden to advertisers, niche shows can be successful, as long as Netflix controls spending. That also gives Netflix the luxury of being able to order full seasons of shows, which appeals to talent.

“Reality is, the biggest distributor of content out there is totally vertically integrated,” said Stephenson. “This happens to be somebody called Netflix. But they create original content; they aggregate original content; and they distribute original content. This thing is moving at lightning speed.”

Hastings derived many of his strategy lessons from a Stanford instructor named Hamilton Helmer. Hastings even invited him to Netflix in 2010 to teach other executives. One of Helmer’s key concepts is called counter-positioning, which Helmer defines as: “A newcomer adopts a new, superior business model which the incumbent does not mimic due to anticipated damage to their existing business.”

Google’s half-billion bet on JD.com

With the second-largest share of China’s B2C e-commerce market after Alibaba’s Tmall, JD.com already sells most major multinational consumer brands within China. Among CPG brands, 100% of home care and 95% of personal care brands are present on the platform. Gartner L2’s recent Digital IQ Index: Beauty China finds that 97% of mass beauty brands are sold on JD.com, either through brand flagships or JD.com-operated stores. Premium beauty brand presence is slightly lower at 77%. International luxury brands have generally been more wary of mass-market e-tailers, but JD.com has scored major names like Saint Laurent and Alexander McQueen since the launch of its luxury app Toplife and white-glove delivery service.


Google places a $550 million bet on China’s second-largest e-commerce player

For its part, JD.com said it planned to make a selection of items available for sale in places like the U.S. and Europe through Google Shopping — a service that lets users search for products on e-commerce websites and compare prices between different sellers. When retailers partner with Google, it gives their products visibility and makes it convenient for consumers to purchase them online. For the tech giant, its shopping service is important in helping to win back product searches from Amazon and to stay relevant in the voice-powered future of e-commerce.


Google is training machines to predict when a patient will die

Google has long sought access to digital medical records, also with mixed results. For its recent research, the internet giant cut deals with the University of California, San Francisco, and the University of Chicago for 46 billion pieces of anonymous patient data. Google’s AI system created predictive models for each hospital, not one that parses data across the two, a harder problem. A solution for all hospitals would be even more challenging. Google is working to secure new partners for access to more records.

A deeper dive into health would only add to the vast amounts of information Google already has on us. “Companies like Google and other tech giants are going to have a unique, almost monopolistic, ability to capitalize on all the data we generate,” said Andrew Burt, chief privacy officer for data company Immuta. He and pediatric oncologist Samuel Volchenboum wrote a recent column arguing governments should prevent this data from becoming “the province of only a few companies,” like in online advertising where Google reigns.

Adobe could be the next $10 billion software company

“The acquisition of Magento will make Adobe the only company with leadership in content creation, marketing, advertising, analytics and now commerce, enabling real-time personalized experiences across the entire customer journey, whether on the web, mobile, social, in-product or in-store. We believe the addition of Magento expands our available market opportunity, builds out our product portfolio, and addresses a key underserved customer need.”

Both have a similar approach to the marketing side, while Salesforce concentrates on the customer including CRM and service components. Adobe differentiates itself with content, which shows up on the balance sheet as the majority of its revenue .


After 20 years of Salesforce, what Marc Benioff got right and wrong about the cloud

Cloud computing can now be “private”: Virtual private clouds (VPCs) in the IaaS world allow enterprises to maintain root control of the OS, while outsourcing the physical management of machines to providers like Google, DigitalOcean, Microsoft, Packet or AWS. This allows enterprises (like Capital One) to relinquish hardware management and the headache it often entails, but retain control over networks, software and data. It is also far easier for enterprises to get the necessary assurance for the security posture of Amazon, Microsoft and Google than it is to get the same level of assurance for each of the tens of thousands of possible SaaS vendors in the world.

The problem for many of today’s largest SaaS vendors is that they were founded and scaled out during the pre-cloud-native era, meaning they’re burdened by some serious technical and cultural debt. If they fail to make the necessary transition, they’ll be disrupted by a new generation of SaaS companies (and possibly traditional software vendors) that are agnostic toward where their applications are deployed and who applies the pre-built automation that simplifies management. This next generation of vendors will put more control in the hands of end customers (who crave control), while maintaining what vendors have come to love about cloud-native development and cloud-based resources.

What’s so special about 21st Century Fox?

The attraction of Fox’s movie studio is clear. 20th Century Fox owns blockbuster franchises like “X-Men” and “Avatar,” as well as a highly regarded arthouse-movie shop in Fox Searchlight. All told, Fox’s studios collected more than $1.4 billion at the box office last year, according to Box Office Mojo.

One is the company’s 39 percent stake in Sky, the European satellite and broadband internet provider, which is already the subject of a bidding war between Comcast and Fox. Here’s what DealBook wrote about the attraction of Sky last week: Based in London, the broadcaster and internet service provider has 23 million customers in five countries, and it owns valuable broadcasting rights to English Premier League games, Formula One races and other sporting events. It also produces its own entertainment programs and has a streaming service, Now TV.

The other is Star, one of India’s biggest broadcasters, which operates 60 channels and the mobile streaming service Hotstar. Neither Comcast nor Disney has a meaningful presence in the fast-growing India market. Owning one of the country’s top content creators and distributors would give either company both a wealth of locally produced content and platforms on which to provide its other movies and TV shows.


Disney tests pricing power at theme parks

Raising prices—currently around $100 on average days and more than $120 during “peak” times around holidays—could mitigate tourist appetite and increase Disney’s profits. Internal projections at Disney show that even after raising prices at roughly double the rate of inflation over the past five years, it could charge much more than it currently does without driving away too many customers, a person familiar with the company’s parks operations said. Disney parks executives are working on adopting a dynamic pricing model similar to airlines, in which prices fluctuate depending on when a ticket is purchased, this person said.

Disney doesn’t release annual attendance figures for its parks, but more than 38.8 million people visited its domestic locations in 2017, an annual increase of about 1.3%, according to the Themed Entertainment Association trade group. Rising prices and attendance at the parks have contributed to strong growth in the company’s parks and resorts division in recent years. Annual income for the segment has grown more than 70% since 2013, hitting $3.8 billion in 2017.

These are the world’s biggest disruptors (and how the disrupteds are fighting back)

According to Barclays, historically the competitive advantage of legacy consumer focused businesses depended on either: 1) creating a monopoly⁄oligopoly in supply (creating a “scarce resource” in the process), or 2) controlling distribution by integrating with suppliers. Here, the fundamental disruption of the internet has been to turn this dynamic on its head by dominating the user experience. Barclays explains further:

First, while the mega-tech internet companies have high upfront capital costs, their user base is so large that the capital costs per user are insignificant, specially relative to revenue generated per user. This means that the marginal costs of serving another customer is effectively zero, thus neutralizing the advantage of exclusive supplier relationships that were leveraged by legacy distributors. Secondly, the internet has led to the creation of infinitely scalable networks that commoditize⁄modularize supply of “scarce resources” (thus disrupting the legacy suppliers of those resources), making it viable for the disrupting internet company to position itself as the key beneficiary of the industry‘s disruption by integrating forward with end users⁄consumers at scale.

As a result of the disruption, the user experience has become the most important factor determining success in the current environment: the disruptors win by providing the best experience, which earns them the most consumers⁄users, which attracts the most suppliers, which enhances the user experience in a virtuous cycle. This is also why so many legacy businesses find themselves unable to compete with runaway disruptors, whose modest advantage quickly becomes an insurmountable lead due to the economics of scale made possible by the internet. This has resulted in a shift of value from the disrupted to the disruptors who modularize⁄commoditize suppliers, integrate the modularized suppliers on their platform, and distribute to consumers⁄users with which they have an exclusive relationship at scale.

This further means that the internet enforces strong winner-take-all effects: since the value of a disruptor to end users is continually increasing it is exceedingly difficult for competitors to take away users or win new ones. This, according to Barclays, makes it difficult to make antitrust arguments based on consumer welfare (the standard for U.S. jurisprudence), but ripe for EU antitrust regulation (which considers monopolistic behavior illegal if it restricts competition).

Japan robot makers outperform Europeans in profitability

Fanuc, Yaskawa Electric and the other two top players worldwide, ABB of Switzerland and Germany’s Kuka, together hold more than 50% of the global market for industrial robots, Nikkei estimates. Fanuc is strong in numerical control devices for machine tools, while Yaskawa boasts expertise in motor technologies. On the European side, ABB is known for dual-arm robots and supplies a wide array of manufacturing equipment, while Kuka’s strength lies in automotive production equipment such as welding robots.

Fanuc is far ahead of the other three in margin, but Yaskawa has boosted its number in recent years. Its margin rose to 9% last fiscal year, surpassing ABB’s 7% and marking the first time in 14 years that the Japanese duo each logged better margins than their two European rivals. In-house production of core component motors helps the Japanese players secure wider margins, said Yoshinao Ibara of Morgan Stanley MUFG Securities. Fanuc’s thoroughly automated production processes also contribute to high profitability.


Why aren’t we all buying houses on the internet?

“The old idea that real estate is never going to change, that we’re going to pay 6 percent, is completely untrue,” argues Glenn Kelman, the CEO of Seattle-based Redfin, a publicly traded brokerage whose calling card is lower commissions. For Kelman, the rush of cash into real estate startups feels like vindication for a corporate model that investors have regarded with skepticism. Redfin’s low-fee model relies on an army of in-house agents who trade typical commissions for the volume that’s possible with internet-generated leads. A Redfin world isn’t a world without real estate agents, but it is one where fewer agents do more. The nation’s 1.4 million working real estate agents do not particularly like Redfin.

Zillow has a different approach. The company hasn’t disrupted the traditional agent model; on the contrary, it’s dependent on it. In the first quarter of 2018, Zillow raked in $300 million in revenue (Redfin’s revenue for all of 2017 was $370 million); more than 70 percent of that came from the company’s “Premier Agents,” who pay for prime placement on the site to generate leads. In becoming an iBuyer (the industry’s term of art, short for “instant buyer”), the company won’t bite the real estate–brokering hand that feeds it. If anything, the pivot provides a lucrative opportunity for local agents to cement their relationships with a company that is trying to become an industrial-scale homebuyer.

Zillow also isn’t the first company to try acting as a middleman. San Francisco–based Opendoor has made tens of thousands of offers on homes, mostly in Sun Belt cities like Phoenix and Dallas. These places are an easier market than New York or San Francisco: The housing stock is newer, cheaper, and more suburban—which is to say, self-similar. Transactions taxes tend to be lower. The company sees itself as competing against seller uncertainty. “[Zillow] keep[s] the agents at the center of the transaction, which is in line with their business model,” says Cristin Culver, head of communications for Opendoor. “And we keep the customer at the center, which is really our North Star, and that’s the difference.” The company’s rapid appraisals make it possible for sellers to skip agents on the first transaction, and after doing some small renovations (paint, HVAC, basic repairs), Opendoor’s “All Day Open House” allows buyers to find and unlock the house themselves with a smartphone. Easy, right? And yet most of them come with an agent, and the company says it’s one of the biggest payers of commissioners in its markets today.*

Why Japan’s sharing economy is tiny

A generous estimate of the sharing’s economy value in Japan is just ¥1.2trn yen ($11bn), compared with $229bn for China. “It’s a very difficult situation,” says Yuji Ueda of Japan’s Sharing Economy Association. Almost 29m tourists visited Japan last year; the goal is to attract 40m by 2020, when Tokyo hosts the Olympics. But the number of hotel rooms is not keeping up with demand.

Indonesia ecommerce through the eyes of a veteran

50% of all ecommerce orders are still limited to JABODETABEK (The Greater Jakarta Area) while the next 30% are in the rest of Java. This leaves 20% spread unevenly throughout Indonesia. Lots of marketing dollars (and education) will have to be spent outside JABODETABEK to push more traffic and conversion online.

Social commerce is massive in Indonesia and it is believed that transactions happening via Facebook and Instagram may be equally as big as the ‘traditional’ ecommerce. As of now, there is no official way to track how big this market is but looking at the data from various last mile operators based on non-corporate customers, this market share is between 25% and 35% of their volumes and has been constantly growing.

Domestic ecommerce supply chain design is becoming more critical in ensuring lower OPEX. Decentralisation of distribution centres are happening with various major marketplaces and 3PL investing in distribution centers (DC) outside JABODETABEK with the objective of bringing products closer to market and also reducing the last mile cost. With a long term view, some too have started investing in having a presence in 3rd Tier Cities outside Java, in line with the government’s infrastructure development.


Malaysia’s economy more diversified than thought

While commodities make up about 20% of total exports, electronics constitute an even larger portion: 37% in 2017. Even when oil prices were at their peak in 2012, commodities comprised 30% of total exports versus electronics at 33%.

Higher oil prices add to the government’s fiscal revenue. We estimate that for every 10% rise in global oil prices, Malaysia’s current account increases by about 0.3 percentage points of GDP after four quarters.

Government estimates suggest that every US$1 per barrel increase in oil prices adds about RM300mil to revenue. That said, oil revenue is only budgeted at 14.8% of revenue for 2018 compared with the peak in 2009 when it constituted some 43% of total fiscal revenue.


SEC says Ether isn’t a security, but tokens based on Ether can be

For the SEC, while cryptocurrencies like bitcoin and ether are not securities, token offerings for stakes in companies that are built off of those blockchains can be, depending on the extent to which third parties are involved in the creation or exchange of value around the assets. The key for the SEC is whether the token in question is being used simply for the exchange of a good or service through a distributed ledger platform, or whether the value of the cryptocurrency is dependent on the actions of a third party for it to rise in value.

“Promoters, in order to raise money to develop networks on which digital assets will operate, often sell the tokens or coins rather than sell shares, issue notes or obtain bank financing. But, in many cases, the economic substance is the same as a conventional securities offering. Funds are raised with the expectation that the promoters will build their system and investors can earn a return on the instrument — usually by selling their tokens in the secondary market once the promoters create something of value with the proceeds and the value of the digital enterprise increases. Just as in the Howey case, tokens and coins are often touted as assets that have a use in their own right, coupled with a promise that the assets will be cultivated in a way that will cause them to grow in value, to be sold later at a profit. And, as in Howey — where interests in the groves were sold to hotel guests, not farmers — tokens and coins typically are sold to a wide audience rather than to persons who are likely to use them on the network.”


Study: Charts change hearts and minds better than words do

Through survey experiments, Nyhan and Reifler arrived at a surprising answer: charts. “We find that providing participants with graphical information significantly decreases false and unsupported factual beliefs.” Crucially, they show that data presented in graphs and illustrations does a better job of fighting misperceptions than the same information presented in text form.

Curated Insights 2018.06.17

What helps or hurts investment returns? Here’s a ranking

An unexpected challenge in performing this exercise is a tendency for some elements to offset others. For example, changes in profits could be offset by widening or contracting price-earnings ratios; sentiment might offset valuation; returns tend to vary inversely with risk. Why does this matter? Because in the real world, one hand giveth while the other taketh away. This concept of cancellation matters a great deal to total portfolio returns.

The overall cost of a portfolio, compounded over 20 or 30 years, can add up to (or subtract) a substantial amount of the returns. One Vanguard Group study noted that a 110 basis-point expense ratio can cost as much as 25 percent of total returns after 30 years. That does not take into consideration other costs such as trading expenses, capital-gains taxes or account location (i.e., using qualified or tax-deferred accounts). The rise of indexing during the past decade is a tacit acknowledgment that on average, cost matters more than stock-picking prowess.

Those people born in 1948 not only managed to have their peak earning and investing years (35-65) coincide with multiple bull markets and interest rates dropping from more than 15 percent to less than 1 percent. They also lucked into a market that tripled in the decade before retirement.

Behavior and discipline > Humility and learning > Longevity and starting early > Valuation and year of birth > Asset allocation > Costs and expenses > Security selection


The forging of a skeptic

I think another thing people have gotten confused about is the sustainable competitive advantage and the moat. Durable competitive advantage and moats are not the same thing as brands. People sometimes use these terms interchangeably. I have also seen people ascribe competitive advantages to brands that don’t have them. For example, retailers — retailers have brands. We all know what Macy’s is, but retailing is fundamentally a bad business.

In essence, the merits of a brand are not the brand itself; they are the qualities of the product that create the consumer loyalty. What attracted him, ultimately, to Coca-Cola is that Coca-Cola’s formula make you more, not less, thirsty, and supposedly has been tested to prove that it doesn’t wear out the palate, no matter how much is consumed. This implies infinite sales potential. The cute commercials and cheery red logo create an association in people’s minds with those qualities. They aren’t what makes it Coca-Cola.

While there are moats that include brands, a brand is not a moat. The moat is whatever qualities are innate to the business that make it difficult to compete with

Worried about big tech? Chinese giants make America’s look tame

They have both funded ventures that offer online education, make electric cars and rent out bicycles. For the giants, such initiatives represent new opportunities for people to use their digital wallets — Ant Financial’s Alipay and Tencent’s WeChat Pay — and new ways to collect data on consumer behavior. Analysts at Sanford C. Bernstein counted 247 investment deals by Tencent in recent years and 156 by Alibaba, though given the pace of the companies’ deal-making, they said their database was “likely to be perennially incomplete.”

In a report this week, Morgan Stanley predicted that by 2027, the total market in China in which Alibaba could be making money will be worth $19 trillion — more than Amazon’s potential market worldwide.

‘As long as they’re unfriendly, it’s a sign they have confidence’

Keyence keeps up compound sales growth of 14 per cent a year (1986-2016) even with sales in the billions of dollars. It takes seemingly simple products such as barcode readers and sells them for five times the cost of manufacture.

Keyence’s first secret is its production outsourcing. It buys raw materials in bulk and sends them to component suppliers; it collects the components and sends them to assemblers and performs the final inspection of goods itself.

The second secret is what Keyence really sells: not a product, but a way to make a factory more efficient. Graeme McDonald, machinery analyst at Citigroup in Tokyo, says the group’s sales engineers “can often provide an idea of how to improve your manufacturing set-up literally on the site with an idea of the payback time and return on investment”. It offers quick victories — such as a sensor to replace manual inspection, for example — not risky projects. “The products they sell are not capital expenditure, they’re cost to the factory manager,” says Mr Noguchi. If the manager can save a $40,000 salary with a $20,000 gadget, they will sign off quickly, without worrying how much Keyence earns.

The products are high quality, if not necessarily unique. Keyence has a modest research budget and less than a tenth of the US patents held by rival automation companies such as Fanuc.

Fanuc in trouble? Talk to the (robot) hand

Fair enough, it’s a tough world for all iPhone dependents. Here’s a wrinkle in the bear-case thesis, though: Overseas shipments of robots and Robodrills from Yokohama, while down elsewhere, are up sharply to Asia. The volume of robots shipped by the port – mostly Fanuc’s – remains close to its highest in decades, at about 5,000 units in April. The company’s backlog of orders is near to its highest in more than two years, according to Bernstein analysts.

How e-commerce with drone delivery is taking flight in China

It is still waiting to earn back its investment in drone-delivery infrastructure, although it says that making a delivery by drone costs a fifth of the price than by man-and-van, once the driver’s labour is taken into account. Liu Qiangdong, JD’s chief executive, says drone delivery will cut costs by 70% once it is scaled up across the country. Villagers tend to buy washing powder, accessories for their phones, maternity goods and fresh food. The firm has made 20,000 such deliveries to date.

JD may have added drones to daily Chinese village life, but whether they will make financial sense for the company over time remains to be seen. Current models of drone are pricey, although JD says the cost will gradually come down as it scales up the network and builds more drones (it plans to sell those it makes to other firms, as well as use them for its operations). The government approves of its operations in rural areas, and is planning to build a new train station in Suqian next to JD’s drone base. If JD can use drone delivery to cut its costs and attract rural shoppers, that will help the firm compete with its arch-rival in e-commerce, Alibaba, which has not, as yet, seen the value of drone delivery. JD hopes that will prove to be a mistake.


Internet lending is booming in China

The balance of online consumer loans in China has grown about fivefold between 2015 and 2017, reaching 350 billion yuan ($54.6 billion), according to Chinese research company Analysys. According to a survey conducted by research specialist Analysys in December 2017, people between the ages of 24 and 35 accounted for more than 70% of consumer borrowers in China.

Chinese consumers, especially people born in 1980 and later, are less squeamish than their older peers about buying on credit. But the total balance of consumer loans in China is still about 60% lower than that in the U.S. and is expected to continue growing. Analysys estimates that the balance of internet loans in China will more than double to 720 billion yuan in 2019, compared with 350 billion yuan in 2017. That flow of credit will likely give a lift to the Chinese consumer market.

The scooter economy

The mistake in Kalanick’s thinking is two-fold: First, up-and-until the point that self-driving cars are widely available — that is, not simply invented, but built-and-deployed at scale — Uber’s drivers are its biggest competitive advantage. Kalanick’s public statements on the matter hardly evinced understanding on this point. Second, bringing self-driving cars to market would entail huge amounts of capital investment. For one, this means it would be unlikely that Google, a company that rushes to reassure investors when it loses tens of basis points in margin, would do so by itself, and for another, whatever companies did make such an investment would be highly incentivized to maximize utilization of said investment as soon as possible. That means plugging into the dominant transportation-as-a-service network, which means partnering with Uber.

My contention is that Uber would have been best-served concentrating all of its resources on its driver-centric model, even as it built relationships with everyone in the self-driving space, positioning itself to be the best route to customers for whoever wins the self-driving technology battle.

Why you should read those boring 10-K filings

The vast majority of the text changes are concentrated in the Management Discussion and Analysis (MD&A) of the 10-K. These disclosures also tend to be more negative than positive, perhaps because the reports are typically drafted by lawyers who tilt toward disclosing negative trends more than positive ones. When the authors applied natural language text processing to evaluate the changes, they found that 86 percent reflected negative sentiment shifts and only 14 percent positive shifts. Furthermore, the text differences contain useful information for predicting future earnings: Changes in the 10-K written text today predict earnings surprises in the future.

Given this negative bias to the textual changes and their ability to predict future earnings, the study shows that companies with 10-K text modifications experience noticeably lower future stock returns than other firms. For example, the authors construct a portfolio that goes long on companies with no material textual changes and shorts firms that contain such changes. That portfolio earns an abnormal positive return of up to 7 percent per year above the market.

Curated Insights 2018.06.10

Laying the pipes of a post-advertising world

Brands have always fought for a place in consumers’ hearts, and then relied on their loyalty for repeat business. Pipes are structural relationships that don’t rely on such fickle factors. They are built on more vertically integrated distribution channels and behave more like utilities — a way into people’s homes and lives attached to an account.

Amazon is the ultimate pipe. Their entire value is that they bring things to you — the things can change as necessary: movies, pickles, sneakers. They own the interface, the invisible moving parts, and the household. They understand your preferences intimately and have become arbiters of choice in many homes. Alexa, buy batteries. You get a big pack of generic batteries, rated 4.5 stars for a good price delivered to your home. Do we really need brands with brand managers and media agencies competing for our attention or do we just need batteries for the remote? If pipes offer simplified decision making, better value and validation — then brands as we know them lose their value.

Advertising was unsustainable from the beginning, for two key reasons. Firstly, when a market fills up, everyone needs to shout louder to get heard, until the noise drowns everything out and a vicious cycle sets in to the detriment of all. Secondly, advertisers pay to reach people, but the audience also pays, with perhaps the most precious resource of all, their attention. You pay attention, and our attentions are more burdened than ever. This is the perfect recipe for people to opt out, should we give them a way to, and we have. In a very short span of time, ads have gone from having captive audiences to being avoidable. Social feeds are designed to skip over anything that doesn’t interest you. Fast forwarding over TV ads is great, but watching ad free content (Netflix) is even better.

Not adapting carries the risk of becoming a price taker in the long run. Adapting can be either through building your own pipe infrastructure, not an easy task and especially difficult for companies not born out of technology, or renting someone else’s pipe and ceding power to them and again facing the potential of long term decline. Disney has chosen the former. Soon they will launch their subscription video competitor to Netflix. With a lot on the line, a transformation of epic proportions lies ahead. Whether it’s successful or not, it speaks volumes that the owner of the most magical brands in the world is entering the pipe race.

The list of advantages pipes and subscriptions have over brands and ads is overwhelming: more consistent income and cash flow, lower marketing costs, better access to customers, more flexibility and control of customer experience, better valuations and access to capital, better quality data and potential for AI. As these factors compound, the shift in the balance of power will accelerate.

Spotify uproar points to the power of the playlist

The furor reflects a reality of today’s music business: Playlists are the new radio, helping major artists rack up millions of streams and connecting lesser-known acts with new fans.

But the findings highlight how influential Spotify can be in determining which songs, albums and artists succeed in the streaming era, he adds. Justin Barker, group director of streaming strategy for PIAS, a U.K.-based group of record labels that works with musicians such as Father John Misty, says that for the majority of its new artists, roughly 60% to 80% of streams are on playlists owned and operated by Spotify.

Spotify has become “a very powerful intermediary,” Mr. Waldfogel says. “The music industry used to get bent out of shape about how much market share Walmart would have. This makes that seem quaint.”


Here’s what Fiat Chrysler’s five-year road map looks like

Adjusted Ebitda will rise to between 13 billion and 16 billion euros by 2022, up from about 6.6 billion in 2017. The 2017 figure excludes the Magneti Marelli parts unit that Fiat Chrysler plans to spin off at the beginning of 2019. Fiat Chrysler also said it will spend about 45 billion euros on capital investments as it tries to harness an evolving automotive market place driven by electrification, connected services and self-driving cars.

Fiat Chrysler plans to form a captive financial unit in the U.S. The company has an option to buy out its existing partner, Santander Consumer USA Holdings Inc., and has initiated discussions, Palmer said. Such a move could add $500 million to $800 million in incremental pretax earnings within four years, he said. Fiat could also start its own business, in which case the company envisions about $100 million in incremental profit. A captive finance unit will allow Fiat Chrysler to “participate more fully in capturing value from emerging platforms,” Palmer said, for example by securitizing vehicle fleets and offering access to service providers on a per-mile basis.

Jeep is targeting 1/12 of all sport utility vehicle sales worldwide by 2022, implying a will more than doubling of deliveries to as many as 3.3 million units, based on Bloomberg calculations from the presentation. Maserati will target Tesla Inc. with a full-electric sports car that reaches more than 186 miles per hour. All Maserati powertrains, including the electric ones, will be supplied by Ferrari NV, the supercar maker spun off from Fiat Chrysler in 2016.

Google emerges as early winner from Europe’s new data privacy law

The reason: the Alphabet ad giant is gathering individuals’ consent for targeted advertising at far higher rates than many competing online-ad services, early data show. That means the new law, the General Data Protection Regulation, is reinforcing—at least initially—the strength of the biggest online-ad players, led by Google and Facebook Inc.

Havas SA, one of the world’s largest buyers of ads, says it observed a low double-digit percentage increase in advertisers’ spending through DBM on Google’s own ad exchange on the first day the law went into effect. On the selling side, companies that help publishers sell ad inventory have seen declines in bids coming through their platforms from Google. Paris-based Smart says it has seen a roughly 50% drop. Amsterdam-based Improve Digital says it has experienced a similar fall-off for ads that rely on third-party vendors.

It took a $1 billion IPO for people to see why Adyen matters

By 2017, Adyen was processing in excess of $122 billion in payments for the year, an increase of 61 percent from the year before, and generated $1.2 billion in revenue, according to financial filings. Uber Technologies Inc., Netflix Inc., Spotify Technology SA, and Facebook Inc., are all customers.

Despite its success so far, Adyen still has some ways to go to catch up with the largest payments firms — Vantiv, Chase Paymentech and First Data each handle about $1 trillion annually — but Adyen differs from many of its rivals in a number of ways: Its transaction processing fees are typically lower than those of other young e-commerce oriented payments firms such as Stripe or Square, and it can handle transfers in more currencies and payment types than Chase Paymentech or Vantiv.

Olivier Bisserier, the chief financial officer at Booking.com, an Adyen customer, told Bloomberg in 2016 that he liked that Adyen was willing to “think like a tech company” rather than a bank. When Booking.com expanded into Argentina, Adyen helped build its payments processing gateway for that market at a time when larger payments processors were refusing to do so until the travel site could show significant sales volumes from the new geography.

Janitors are becoming millionaires thanks to this stock’s 9,500% rally

Sunny Optical’s affluent employees have benefited from the largesse of Wang Wenjian, who started the company in Yuyao, a small city on China’s eastern coast, in 1984. When Sunny Optical restructured from a so-called village and township enterprise into a joint-stock company in the 1990s, Wang took the rare step of distributing stakes beyond top management and later organizing the holdings into a trust that now has about 400 holders and owns 35 percent of the Hong Kong-listed company. Leaving a 6.8 percent stake for himself in 1994, Wang allowed quality inspectors, company cooks and cleaners to subscribe for shares at a negligible cost based on their position and years of service.

“When money gathers, people will be apart; when money is scattered, people will gather.”

Curated Insights 2018.06.03

How will GDPR affect digital marketers?

  • Organisations with an existing marketing database must re-solicit every person’s consent (via an explicit opt-in) since individuals may have been added to the database without their consent.
  • All opt-out consent boxes must be replaced by opt-in (without the box being pre-checked).
  • Collection and processing of data to deliver your core service (e.g. fulfil orders) can continue unchanged, but if you wish to use historical data for marketing purposes, you need consent.
  • Personalised ad targeting based on an individual’s specific behaviours, such as that offered by many programmatic media companies, is illegal without active content. However, targeting based on broad interest-based audience segments is permissible so long as individuals cannot be identified.
  • The purchasing or sharing of personal data (such as email lists) is prohibited unless each person in the list has expressly permitted their details to be passed on to third parties. Event organisers, for example, can no longer share lists of attendees with sponsors.
  • Where data must be passed to another organisation for legitimate business reasons, you should ensure they are also compliant with GDPR. This is particularly important if data is passed to organisations outside the EU who may be less familiar with its data protection obligations.
  • Your customers now have the right to ask what data you hold and to have their data deleted permanently.
  • Any breach of personal data integrity (e.g. through theft, hacking, or incompetence) must be notified to the authorities within 72 hours. Organisations should audit who has access to personal data and ensure they are aware of their GDPR security obligations.

The iPhone may not be what finally pushes Apple over $1tn

The performance of this services division, largely overseen by senior vice-president Eddy Cue, has been a model of consistency when placed next to the feast-or-famine performance of the iPhone. Since 2006, it has grown at an average rate of 23 per cent year on year, according to Gene Munster, a veteran Apple analyst turned investor at Loup Ventures.

If it was valued like other “software as a service” companies such as Adobe, Dropbox or Intuit, Mr Munster reckons, at a multiple of 10 times 2018’s estimated revenues, Apple’s services business would be worth $381bn all by itself. 

For Google, all roads lead back to search

Underpinning this is the mobile business, which has given Google’s search engine a new lease of life. With smartphone users carrying out more frequent internet searches, the “paid clicks” — the number of times users click on its advertisements — jumped 59 per cent in the first three months of this year, continuing an acceleration seen over recent quarters. Even with average ad prices falling 19 per cent, the result has been a pick-up in growth.

The question now is whether Google’s newer businesses will extend this momentum into new markets in the years to come. Foremost among them is YouTube. The online video arm already has $20bn in annual revenue and could grow at 20-30 per cent a year for the next five years, forecast Mark Mahaney, an analyst at RBC Capital Markets. The potential is enormous: YouTube’s revenue represents only around 10 per cent of the amount spent globally on traditional TV advertising.

Google’s cloud computing business, meanwhile, could represent an even bigger opportunity. The cloud market is projected to be worth nearly $250bn by 2021, according to tech research firm Gartner.

That could one day make driverless cars a huge business for Google. Analysts at UBS forecast that Waymo’s technology lead will translate into revenues for Alphabet in 2030 that are equivalent to 80 per cent of its entire group revenue in 2020.

Marchionne’s finale entails expanding Jeep, shrinking Fiat

Jeep — which accounts for more than 70 percent of profits, according to analysts’ estimates — will increasingly become the focal point of the group. Marchionne is set to target doubling the brand’s sales volume by 2022 from about 1.4 million vehicles last year. The growth is based on expanding Jeep’s presence in Asia, Brazil and Europe as well as widening its product offering with hybrid variants starting next year. Marchionne has already indicated that he sees chances to double the group’s profit in the coming five years on booming Jeep sales.

Buffett proposed $3 billion Uber investment but deal crumbled

Under the proposed agreement, Berkshire Hathaway would have provided a convertible loan to Uber that would have protected Buffett’s investment should Uber hit financial straits, while providing significant upside if Uber continued to grow in value, said the people, who spoke under condition of anonymity because the discussions were private. Buffett’s initial offer was well above $3 billion, one of the people said.

During negotiations Uber Chief Executive Officer Dara Khosrowshahi proposed decreasing the size of the deal to $2 billion, one person said, hoping to get Buffett’s backing while giving him a potentially smaller share of the company. The deal fell apart after the two sides couldn’t agree on terms, one of the people said.


Airbnb founders go it alone in China after refusing merger offer

Tujia remains keen to cut a deal—although both sides deny formal talks—and says it’s simply waiting for Airbnb executives to accept reality. “We would love to issue shares in Tujia in exchange for Airbnb’s China operations,” says Tujia Chief Financial Officer Warren Wang. Until Airbnb is ready, “we will prove ourselves and show our muscle,” he said. “If Airbnb needs more time to understand that they or any other foreign tech companies just can’t do that well in China without a local partner, once we show them they’ll sit down and talk about a deal.”

Home-sharing in China differs from the U.S. and Europe, where travelers are accustomed to a rich bed-and-breakfast culture and many hosts rent out their primary homes while they’re away. In China, hosts don’t want strangers in their own homes. Instead, home sharing has thrived because a national building boom left a glut of empty apartments in the hands of real estate firms and property investors. With homes vacant, local home-sharing companies are tapped to clean, list and manage properties.

Initially, Airbnb operated a skeleton operation in China with 30 people, focused on attracting mainlanders going overseas. Chinese tourists took 131 million overseas trips and spent $115 billion abroad last year, according to the China National Tourism Academy. But after noticing a surge of Chinese tourists using Airbnb abroad and thriving local home-sharing apps, the company in 2015 decided to expand its domestic China business. It’s a market well worth chasing: The domestic tourism industry took in 4.57 trillion yuan ($710 billion) in 2017, up 15.9 percent from the year before, according to the China National Tourism Administration. Unlike small hotel rooms, home stays let Chinese travel with extended families, cook Chinese fare and bring pets.

A Fed report this week found that gig work is a very small share of family income. For over 75% of gig workers, these activities account for 10% or less of their family income. This picture is also confirmed when looking at the ride-sharing market, see first chart below. The total number of Uber drivers in the US is 833,000 and translated into full-time full-year jobs there are about 100,000 Uber drivers. Comparing these numbers with US economy-wide employment of 148mn shows that the gig economy is more myth than reality. Another way to look at it is to think about how small a share of your total income goes to car services. If you still are not convinced, take a look at the second chart below, which shows the share of people who are self-employed. Why is the gig economy getting so much attention? It is probably because many people in Manhattan now use ride-sharing apps and mistakenly think that what they are seeing is representative for the rest of the economy.

Curated Insights 2018.05.27

Borrow…If you dare

Your problem is the margin. With $10,000 to start, if you borrowed millions, you would lose all of your equity. In fact, having a leverage ratio more than 4:1 ($30,000 borrowed) would have wiped you out in most years. It’s not a matter of if, but a matter of when.

As soon as he said it, I knew he was right. I had forgotten one of the simplest ideas in finance: the path matters. The problem is that while we know that you will get an a high return by the end of the year, if you hit a bad patch of too many negative return days in a row (which is normal), the leverage will wipe you out completely. In other words, the journey is more important than the destination.

The point of all of this is that even when we know the future with certainty, borrowing money isn’t a surefire solution to win big. Given we will never know the future with any degree of certainty, leverage is one of the most dangerous things you can do as a retail investor, so I do not recommend it. If Warren Buffett only levered 1.6:1 on average throughout his career, and he is arguably the greatest investor of all time, what chance do you stand of using leverage properly?

Your investment journey will effect you far more than your investment destination. Just because you know the market should get 7% on average each year doesn’t mean you won’t live through sharp declines and decades of no real returns. These kinds of events are rare, but they happen and they can affect how you perceive markets.

The Bill Gates Line

This is ultimately the most important distinction between platforms and aggregators: platforms are powerful because they facilitate a relationship between 3rd-party suppliers and end users; aggregators, on the other hand, intermediate and control it.

Of course that is the bigger problem: I noted above that Google’s library of ratings and reviews has grown substantially over the past few years; users generating content is the ultimate low-cost supplier, and losing that supply to Google is arguably a bigger problem for Yelp than whatever advertising revenue it can wring out from people that would click through on a hypothetical Google Answer Box that used 3rd-party sources. And, it should be noted, that Yelp’s entire business is user-generated reviews: they and similar vertical sites are likely to do a far better job of generating, organizing, and curating such data.

Presuming that the answer is the image on the right — driving users to Yelp is both better for the bottom line and better for content generation, which mostly happens on the desktop — and it becomes clear that Yelp’s biggest problem is that the more useful Google is — even if it only ever uses Yelp’s data! — the less viable Yelp’s business becomes. This is exactly what you would expect in an aggregator-dominated value chain: aggregators completely disintermediate suppliers and reduce them to commodities.


If we end up sitting around in self-driving cars watching ads, Google is going to make billions

New research from UBS predicts that US autonomous-vehicle revenue will reach $2.3 trillion by 2030—and 70% of the estimated is expected to come from selling experiences to the former drivers. The biggest opportunity—$1.2 trillion—will be in robo-taxi services, moving people and things around in autonomous vehicles.

The second-biggest opportunity, or $472 billion, will be in in-car monetization: selling ads or services against the time spent in the car not driving. Not surprisingly, UBS thinks Waymo—or more broadly, Google’s parent company Alphabet—will be the dominant player in this category, perhaps capturing 60% of the revenue. UBS thinks Waymo’s combined opportunities in services and software make Waymo worth $75 billion today, or roughly 11% of Alphabet’s current valuation.


Netflix misunderstandings, pt. 1: Netflix’s content budget is bigger than it seems

While it might seem pedantic to criticize statements such as “Netflix will spend between $7 billion and $8 billion on content in 2018,” the distinction is critical. To point, Netflix’s 2018 spend is likely to be closer to $12B. Not only is this nearly 50% more than publicized, it means that Netflix will spend more on non-sports content than any of its traditional TV peers (e.g. Disney, Time Warner, NBCUniversal) – even when their many individual networks are consolidated on a corporate basis. What’s more, the disconnect between Netflix’s cash spend on content and amortization expense has grown substantially over time. In 2012, this ratio was 1.1x (cash spend 10% higher than amortization). In both 2016 and 2017, it was 44%. As a result of this growth, the impact of conflating or confusing the two has also grown.

Netflix’s content costs are high in part because it now buys out all the rights (e.g. home video, syndication, EST) for its Originals on a global basis, while traditional networks (e.g. FX or ABC) will typically buy only select content rights and on a single market basis. Furthermore, buying out all rights means that the talent involved in a hit series (e.g. cast, writers, producers) don’t have access to any of the economic upside from participating in a hit series. As such, Netflix must also pay extra (and upfront) to compensate the talent responsible for their Originals for this lost income opportunity (albeit on a risk-adjusted basis). As a result, Netflix’s costs for a given volume of original content is substantially higher than that of linear and/or domestic networks with the same output. That said, this same dynamic means that while most of its traditional networks hedge their content investments, Netflix quadruples down.

Netflix’s critics and competitors typically focus on the fact that, while profitable on an accounting basis, Netflix keeps spending more cash than it generates from operating its business. The company burned $2B in cash in 2017 (up from $1.7B a year earlier), and expects that figure to grow to $3–4B in 2018. What’s more, Netflix CEO Reed Hastings has promised that negative free cash flow will continue for “many years” and the company continues to accumulate debt (raising annual interest expenses) and content liabilities (increasing the amount it’ll need to pay suppliers over time). However, this cash loss only exists because Netflix is funding next year’s content against this year’s revenue. Netflix could have chosen to stabilize its 2018 content offering at 2017 levels (i.e. not ramp up spending), and its actual cash spent would have been just $6.2B (roughly equivalent to its content amortization) – a “savings” on the books of $2.7B. And had the company done this, it would would have generated $700MM in cash, not lost $2B.

Making sense of mortgages: The problem, and the opportunity

The single most important chart for any portfolio manager or investor – The power of diversification (low correlation)

Of course, the picture represents ideal conditions. There is some bad news with this free lunch. It is hard to find. You will not find many low correlated asset classes and those return to risk values can be volatile. The incremental improvement is strong with the first few diversifiers but there are diminishing returns after that initial boost.

In a practical sense, the first asset class you add to an equity portfolio will be bonds. It has been the great diversify for the last decade or two, but once you get beyond bonds and commodities, the ability to find those low correlation assets becomes much harder. This is the true value of alternative strategies

What does this chart mean in reverse? If there is an increase in correlation across asset classes, the return to risk will fall even if the return to risk of any given strategy stays constant. This is will be the incredible shrinking free lunch and is why it is so important to find strategies or investments that have stable correlation relative to traditional asset classes.

Return is critical but hard to forecast. Volatility is important and leads to downside risks. Unfortunately, many forget the power of covariance and its impact on diversification, yet this is component to portfolio construction that can have a strong impact.

Next climate challenge: A/C demand expected to triple

The amount of energy needed for cooling will triple, reaching a level equal to China’s total power demand, the new report finds. As the world warms in response to human-caused climate change, the need for air conditioning will become more acute, particularly in the Middle East and South Asia. IEA estimates that left unchecked, air conditioning will account for 18 percent of the total worldwide increase in CO2 emissions by 2050. And rising demand for cooling is “already putting enormous strain on electricity systems in many countries,” IEA said.

Curated Insights 2018.05.20

The spectacular power of Big Lens

There is a good chance, meanwhile, that your frames are made by Luxottica, an Italian company with an unparalleled combination of factories, designer labels and retail outlets. Luxottica pioneered the use of luxury brands in the optical business, and one of the many powerful functions of names such as Ray-Ban (which is owned by Luxottica) or Vogue (which is owned by Luxottica) or Prada (whose glasses are made by Luxottica) or Oliver Peoples (which is owned by Luxottica) or high-street outlets such as LensCrafters, the largest optical retailer in the US (which is owned by Luxottica), or John Lewis Opticians in the UK (which is run by Luxottica), or Sunglass Hut (which is owned by Luxottica) is to make the marketplace feel more varied than it actually is.

Now they are becoming one. On 1 March, regulators in the EU and the US gave permission for the world’s largest optical companies to form a single corporation, which will be known as EssilorLuxottica. The new firm will not technically be a monopoly: Essilor currently has around 45% of the prescription lenses market, and Luxottica 25% of the frames. But in seven centuries of spectacles, there has never been anything like it. The new entity will be worth around $50bn (£37bn), sell close to a billion pairs of lenses and frames every year, and have a workforce of more than 140,000 people. EssilorLuxottica intends to dominate what its executives call “the visual experience” for decades to come.

For a long time, scientists thought myopia was primarily determined by our genes. But about 10 years ago, it became clear that the way children were growing up was harming their eyesight, too. The effect is starkest in east Asia, where myopia has always been more common, but the rate of increase has been uniform, more or less, across the world. In the 1950s, between 10% and 20% of Chinese people were shortsighted. Now, among teenagers and young adults, the proportion is more like 90%. In Seoul, 95% of 19-year-old men are myopic, many of them severely, and at risk of blindness later in life.

Del Vecchio paid $645m (£476m) for Ray-Ban. During the negotiations, he promised to protect thousands of jobs at four factories in the US and Ireland. Three months later, he closed the plants and shifted production to China and Italy. Over the next year and a half, Luxottica withdrew Ray-Ban from 13,000 retail outlets, hiked their prices and radically improved the quality: increasing the layers of lacquer on a pair of Wayfarers from two to 31. In 2004, to the disbelief of many of his subordinates, del Vecchio decided that Ray-Ban, which had been invented for American pilots in the 1930s, should branch out from sunglasses into optical lenses, too. “A lot of us were sceptical. Really? Ray. Ban. Banning rays from the sun?” the former manager said. “But he was right.” Ray-Ban is now the most valuable optical brand in the world. It generates more than $2bn (£1.5bn) in sales for Luxottica each year, and is thought to account for as much as 40% of its profits.

The Moat Map

Facebook has completely internalized its network and commoditized its content supplier base, and has no motivation to, for example, share its advertising proceeds. Google similarly has internalized its network effects and commoditized its supplier base; however, given that its supply is from 3rd parties, the company does have more of a motivation to sustain those third parties (this helps explain, for example, why Google’s off-sites advertising products have always been far superior to Facebook’s).

Netflix and Amazon’s network effects are partially internalized and partially externalized, and similarly, both have differentiated suppliers that remain very much subordinate to the Amazon and Netflix customer relationship.

Apple and Microsoft, meanwhile, have the most differentiated suppliers on their platform, which makes sense given that both depend on largely externalized network effects. “Must-have” apps ultimately accrue to the platform’s benefit.

Apple’s developer ecosystem is plenty strong enough to allow the company’s product chops to come to the fore. I continue to believe, though, that Apple’s moat could be even deeper had the company considered the above Moat Map: the network effects of a platform like iOS are mostly externalized, which means that highly differentiated suppliers are the best means to deepen the moat; unfortunately Apple for too long didn’t allow for suitable business models.

Uber’s suppliers are completely commoditized. This might seem like a good thing! The problem, though, is that Uber’s network effects are completely externalized: drivers come on to the platform to serve riders, which in turn makes the network more attractive to riders. This leaves Uber outside the Moat Map. The result is that Uber’s position is very difficult to defend; it is easier to imagine a successful company that has internalized large parts of its network (by owning its own fleet, for example), or done more to differentiate its suppliers. The company may very well succeed thanks to the power from owning the customer relationship, but it will be a slog.

How much would you pay to keep using Google?

Part of the problem is that GDP as a measure only takes into account goods and services that people pay money for. Internet firms like Google and Facebook do not charge consumers for access, which means that national-income statistics will underestimate how much consumers have benefitted from their rise.

Survey respondents said that they would have to be paid $3,600 to give up internet maps for a year, and $8,400 to give up e-mail. Search engines appear to be especially valuable: consumers surveyed said that they would have to be paid $17,500 to forgo their use for a year.


There is another

Spotify has better technology, merchandising (like discovery playlists), and brand. Unlike Apple Music, being a pure-play (as opposed to being owned by a tech giant) gives Spotify more cred among purists, young people, and influencers. The instinct / T Algorithm cocktail has resulted in a firm with 170M users, 75M of whom are premium subscribers. The firm registered €1B this quarter, representing 37% growth. Spotify accounted for 36% of premium music subscribers globally.

What takes Spotify to $300B, and true horseman status? They launch video, and become the most successful streaming entertainment firm, full stop. Netflix’s legacy is on the second most important screen, TV. Spotify was raised on the most important – mobile. Netflix needs to become Spotify before Spotify becomes Netflix. Nobody has cracked social and TV, and as half of young people no longer watch cable TV, if Spotify were to launch video and captured any reasonable share and engagement via unique playlists, then cable and Netflix would begin ceding market cap to Spotify.


Subscriptions for the 1%

The problem with these minuscule conversion rates is that it dramatically raises the cost of acquiring a customer (CAC). When only 1% of people convert, it concentrates all of that sales and marketing spend on a very small sliver of customers. That forces subscription prices to rise so that the CAC:LTV ratios make rational sense. Before you know it, what once might have been $1 a month by 20% of a site’s audience is now $20 a month for the 1%.

There is a class of exceptions around Netflix, Spotify, and Amazon Prime. Spotify, for instance, had 170 million monthly actives in the first quarter this year, and 75 million of those are paid, for an implied conversion of 44%. What’s unique about these products — and why they shouldn’t be used as an example — is that they own the entirety of a content domain. Netflix owns video and Spotify owns music in a way that the New York Times can never hope to own news or your podcast app developer can never hope to own the audio content market.

The Apple Services machine

It is this hardware dependency that makes it impossible to look at Apple Services as a stand-alone business. The Services narrative isn’t compelling if it excludes Apple hardware from the equation. Apple’s future isn’t about selling services. Rather, it’s about developing tools for people. These tools will consist of a combination of hardware, software, and services.

Apple currently has more than 270 million paid subscriptions across its services, up over 100 million year-over-year. Apple is in a good position to benefit from growing momentum for video streaming services including Netflix, HBO, and Hulu. It is not a stretch to claim that Apple will one day have 500 million paid subscriptions across its services. Apple isn’t becoming a services company. Instead, Apple is building a leading paid content distribution platform.

Tencent Holdings Ltd. delivered two major milestones when it reported its earnings Wednesday: record quarterly profits and more than one billion monthly active users on its WeChat platform. The social media and gaming giant, which has been leery of barraging its users with ads, also declared it had raised the maximum number of ads that customers see on WeChat Moments from one a day to two. The app has become China’s most popular messaging service and is integral to driving everything from gaming and payments to advertising for Tencent.

MoviePass: the unicorn that jumped into Wall Street too soon

“The growth-at-all-costs strategy is being funded these days by the venture community, not the public market. The last time we saw the public markets fund a growth-at-all-costs strategy was the 1999 internet bubble, and we all know how that ended.”

The prospect of steep declines in a company’s valuations once it hits the public markets is one reason why U.S. companies are waiting longer to go public. Overall, U.S. companies that have gone public this year have done so at an average market capitalization of $1.1 billion, according to Thomson Reuters data, a 44 percent increase from the average market cap during the height of the dot com craze in 1999. At the same time, companies are now going public 6.5 years after receiving their first venture capital backing on average, more than double the three years between initial funding and going public in 1999.

Cerebras: The AI of cheetahs and hyenas

The specialist starts out with a technology optimized for one specific task. Take the graphics-processing unit. As its name denotes, this was a specialist technology focused on a single task–processing graphics for display. And for the task of graphics, graphics-processing units are phenomenal. Nvidia built a great company on graphics-processing. But over time, the makers of graphics-processing units, AMD and Nvidia, have tried to bring their graphics devices to markets with different requirements, to continue the analogy to hunt things that aren’t gazelle. In these markets, what was once a benefit, finely tuned technology for graphics (or gazelle-hunting), is now a burden. If you hunt up close like a leopard and never have to run fast, having your nose smooshed into your face is not an advantage and may well be a disadvantage. When you hunt things you were no longer designed to hunt, the very things that made you optimized and specialized are no longer assets.

Intel is the classic example of a generalist. For more than 30 years the x86 CPU they pioneered was the answer to every compute problem. And they gobbled up everything and built an amazing company. But then there emerged compute problems that specialists were better at, and were big enough to support specialist companies—such as cell phones, graphics and we believe AI. In each of these domains specialist architectures dominate.

We are specialists, designing technology for a much more focused purpose than the big companies burdened with multiple markets to serve and legacy architectures to carry forward. Specialists are always better at their target task. They do not carry the burden of trying to do many different things well, nor the architectural deadweight of optimizations for other markets. We focus and are dedicated to a single purpose. The question of whether we—and every other specialist– will be successful rests on whether the market is large enough to support that specialist approach. Whether, in other words, there are enough gazelle to pursue. In every market large enough, specialists win. It is in collections of many modest markets, that the generalist wins. We believe that the AI compute market will be one of the largest markets in all of infrastructure. It will be the domain of specialists.


This $2 billion AI startup aims to teach factory robots to think

What sets Preferred Networks apart from the hundreds of other AI startups is its ties to Japan’s manufacturing might. Deep learning algorithms depend on data and the startup is plugging into some of the rarest anywhere. Its deals with Toyota and Fanuc Corp., the world’s biggest maker of industrial robots, give it access to the world’s top factories. While Google used its search engine to become an AI superpower, and Facebook Inc. mined its social network, Preferred Networks has an opportunity to analyze and potentially improve how just about everything is made.

At an expo in Japan a few months later, another demo showed how the tech might one day be used to turn factory robots into something closer to skilled craftsmen. Programming a Fanuc bin-picking robot to grab items out of a tangled mass might take a human engineer several days. Nishikawa and Okanohara showed that machines could teach themselves overnight. Working together, a team of eight could master the task in an hour. If thousands — or millions — were linked together, the learning would be exponentially faster. “It takes 10 years to train a skilled machinist, and that knowledge can’t just be downloaded to another person” Fanuc’s Inaba explained. “But once you have a robot expert, you can multiply it infinitely.”

China buys up flying schools as pilot demand rises

In September Ryanair axed 20,000 flights due to a rostering mess-up made worse by pilot shortages. This forced the low-cost carrier to reverse a longstanding policy and recognise trade unions and agree new pay deals — a move that it said would cost it €100m ($120m) a year from 2019.

China is on course to overtake the US as the world’s largest air travel market by 2022, according to the International Air Transport Association.

US aircraft maker Boeing predicts China will need 110,000 new pilots in the years through to 2035, and its airlines are expected to purchase 7,000 commercial aircraft over the next two decades.

China’s aviation market grew by 13 per cent last year, with 549m passengers taking to the skies, double the number who flew in 2010. Growth is being driven by the rising middle class, an expansion of routes by Chinese airlines and the easing of visa restrictions by foreign governments keen to attract Chinese tourists.

California will require solar power for new homes

Long a leader and trendsetter in its clean-energy goals, California took a giant step on Wednesday, becoming the first state to require all new homes to have solar power.

The new requirement, to take effect in two years, brings solar power into the mainstream in a way it has never been until now. It will add thousands of dollars to the cost of home when a shortage of affordable housing is one of California’s most pressing issues.

Just half a percent

If you save $5,000 a year for 40 years and make only 8% (the “small” mistake), you’ll retire with about $1.46 million. But if you earn 8.5% instead, you’ll retire with nearly $1.7 million. The additional $230,000 or so may not seem like enough to change your life, but that additional portfolio value is worth more than all of the money you invested over the years. Result: You retire with 16% more.

Your gains don’t stop there. Assume you continue earning either 8% or 8.5% while you withdraw 4% of your portfolio each year and that you live for 25 years after retirement. If your lifetime return is 8%, your total retirement withdrawals are just shy of $2.5 million. If your lifetime return is 8.5% instead, you withdraw about $3.1 million. That’s an extra $600,000 for your “golden years,” a bonus of three times the total dollars you originally saved.

Your heirs will also have plenty of reasons to be grateful for your 0.5% boost in return. If your lifetime return was 8%, your estate will be worth about $3.9 million. If you earned 8.5% instead, your estate is worth more than $5.1 million.

Keep your investment costs low.
Slowly increasing your savings rate over time.
Consistently saving while treating investment contributions like a periodic bill payment.
Bettering your career prospects to increase your income over time.
Avoiding behavioral investment mistakes which can act as a counterweight to the benefits of compounding.

Curated Insights 2018.05.13

Who’s winning the self-driving car race?

Only Waymo has tested Level 4 vehicles on passengers who aren’t its employees—and those people volunteered to be test subjects. No one has yet demonstrated at Level 5, where the car is so independent that there’s no steering wheel. The victors will also need to pioneer businesses around the technology. Delivery and taxi services capable of generating huge profits is the end game for all.

Goldman Sachs Group Inc. predicts that robo-taxis will help the ride-hailing and -sharing business grow from $5 billion in revenue today to $285 billion by 2030. There are grand hopes for this business. Without drivers, operating margins could be in the 20 percent range, more than twice what carmakers generate right now. If that kind of growth and profit come to pass—very big ifs—it would be almost three times what GM makes in a year. And that doesn’t begin to count the money to be made in delivery.

Waymo had three collisions over more than 350,000 miles, while GM had 22 over 132,000 miles.

After Waymo, a handful of major players have demonstrated similar driving capabilities. It’s hard to say anyone has an edge. One advantage for GM: There’s a factory north of Detroit that can crank out self-driving Bolts. That will help GM get manufacturing right and lower costs without relying on partners. Right now, an autonomous version of the car costs around $200,000 to build, compared to a sticker price of $35,000 for an electric Bolt for human drivers.

Musk wants to use cameras and develop image-recognition capabilities so cars can read signs and truly see the road ahead. He has said Tesla is taking the more difficult path, but if he can come up with a better system, he will have mastered true autonomy without the bulky and expensive hardware that sits on top of rival self-driving cars. “They’re going to have a whole bunch of expensive equipment, most of which makes the car expensive, ugly and unnecessary,” Musk told analysts in February. “And I think they will find themselves at a competitive disadvantage.”

China’s got Jack Ma’s finance giant in its crosshairs

The rules will force Ant and some of its peers that straddle at least two financial industries to obtain licenses from China’s central bank and meet minimum capital requirements for the first time, according to people familiar with the matter, who asked not to be identified discussing private information. The companies’ ownership structures and inter-group transactions will also be restricted, the people said, adding that the rules need approval from China’s State Council and are subject to change.


Starbucks: A big deal should mean a sharper focus

The deal appeared positive because it ”accelerates the reach of Starbucks’ channel development segment globally by providing Starbucks with a strong distribution partner; and enables Starbucks to step up shareholder returns.

CEO Kevin Johnson said as much on the conference call. “We’ve been very focused on streamlining the company in a way that allows us to put our focus and energy behind the highest priority value creation drivers for the company,” he said. “And certainly, our retail business in the U.S. and China are the two big growth engines.”


Tinder: ‘Innovation’ can help it fight off Facebook

“In digital, and especially on mobile, there is always one brand that defines each core use case,” Ross wrote. “In dating, it is Tinder, whose user base and subscription base continue to explode globally. We don’t see that changing, even with scaled competition from Facebook.”

Tinder’s brand, scale and “freemium” model—with free basic access and the opportunity to pay up—should continue to make it appealing to users (particularly younger ones) even as new competitors emerge, according to Ross. “There is no real reason for singles not to still use the platform,” he wrote.

“The hard paywall brands tend to be those that are for the more serious online dater,” Ross noted, including older users and those seeking comparatively long-term relationships. “This is not only where Facebook has said it will focus, but also where it can best leverage its data and recommendation capabilities.”


Why A.I. and cryptocurrency are making one type of computer chip scarce

Crypto miners bought three million G.P.U. boards — flat panels that can be added to personal and other computers — worth $776 million last year, said Jon Peddie, a researcher who has tracked sales of the chips for decades. That may not sound like a lot in an overall market worth more than $15 billion, but the combination of A.I. builders and crypto miners — not to mention gamers — has squeezed the G.P.U. supply. Things have gotten so tight that resellers for Nvidia, the Silicon Valley chip maker that produces 70 percent of the G.P.U. boards, often restrict how many a company can buy each day.


PayPal: How it can fight back against Amazon Pay

“Given its two-sided network of 218 million consumers in the PayPal digital wallet and 19 million merchants for whom PayPal provides online & mobile merchant acquiring services, plus Xoom and Braintree, PayPal benefits from one of the most extensive payments ecosystems globally. Within this ecosystem, PayPal offers the best mobile wallet with an 89% conversion ratio from shopping cart to payment, creating strong consumer and merchant lock-in.”

It has other ways to provide incentives. “PayPal enjoys strategic alliances with Visa, Mastercard, Google, Facebook, Apple, Alibaba, Baidu, and a number of financial institutions, including Bank of America and HSBC, allowing it access to a vast customer base and potential consumer incentive plans,” they wrote, noting an HSBC offer to pay customers $25 if they link their cards to PayPal.

Etsy CEO: ‘Signs of progress’ in boosting repeat business

Etsy isn’t trying to become a place people shop every day, but it does want people to shop there more often. (The company cites figures saying 60% of customers buy just once a year.) It said both new and repeat buyers were up 20% year-over-year in Q1, which Silverman called “early signs of progress.”

Management wants to increase the “lifetime value” of a shopper by creating a cycle in which the company pays an acceptable rate for a new user, converts them to a buyer and then a repeat buyer, and then translates the money that buyer provides into more efficient marketing that acquires more new customers.

As Warren Buffett’s empire expands, many jobs disappear

Despite Buffett’s folksy image, Berkshire has thrived for years by keeping things lean and buying companies that—in his own words—are run by “cost-conscious and efficient managers.” The result? Buffett hasn’t shut down many operations during his five decades atop the firm. But more than two dozen of his companies employ fewer people today than they used to.

Berkshire often doesn’t note in the data when one of its businesses buys another, which can make it seem like there’s hiring when the conglomerate is just absorbing people. The company also doesn’t always make clear when units are combined or spun out of others.

The formula behind San Francisco’s startup success

Losing money is not a bug. It’s a feature. Not making money can be the ultimate competitive advantage, if you can afford it, as it prevents others from entering the space or catching up as your startup gobbles up greater and greater market share. Then, when rivals are out of the picture, it’s possible to raise prices and start focusing on operating in the black.

You might wonder why it’s so much better to lose money provided by Sequoia Capital than, say, a lower-profile but still wealthy investor. We could speculate that the following factors are at play: a firm’s reputation for selecting winning startups, a willingness of later investors to follow these VCs at higher valuations and these firms’ skill in shepherding portfolio companies through rapid growth cycles to an eventual exit.

Cheap innovations are often better than magical ones

Much of what we call “artificial intelligence”, say the authors, is best understood as a dirt-cheap prediction. Sufficiently accurate predictions allow radically different business models.

If a supermarket becomes good enough at predicting what I want to buy — perhaps conspiring with my fridge — then it can start shipping things to me without my asking, taking the bet that I will be pleased to see most of them when they arrive.

Another example is the airport lounge, a place designed to help busy people deal with the fact that in an uncertain world it is sensible to set off early for the airport. Route-planners, flight-trackers and other cheap prediction algorithms may allow many more people to trim their margin for error, arriving at the last moment and skipping the lounge.

Then there is health insurance; if a computer becomes able to predict with high accuracy whether you will or will not get cancer, then it is not clear that there is enough uncertainty left to insure.


The future of digital payments? Computational contracts, says Wolfram

Wolfram anticipates at least three levels of computational contracts, from minor transactions (less than $50) to mid-level (thousands of dollars) and high-end (in the millions).

“The lowest level–typically involving small amounts of money–one will be happy to execute just using someone’s cloud infrastructure (compare Uber, AirBnB, etc.),” he writes in his blog post. “There’s then a level at which one wants some degree of distributed scrutiny, and one expects a certain amount of predictability and reliability. This is potentially where blockchain (either public or private) comes in.

“But at the highest level–say transactions involving millions of dollars–nobody is going to realistically want to completely trust them to an automated system (think: DAO, etc.). And instead one’s going to want the backing of insurance, the legal system, governments, etc.: in other words one’s going to want to anchor things not just in something like a blockchain, but in the ‘weightiest’ systems our current society has to offer.”

A hedge-fund fee plan that only charges for alpha

Consider a hypothetical traditional hedge firm that has $1 billion of assets under management and another that charges a fulcrum fee of 0.75 percent, plus a quarter of the profits. If the markets rise 10 percent and the fund outperforms by 200 basis points, or 2 percent, a traditional hedge fund would charge $20 million (2 percent of $1 billion), plus a performance fee of $24 million (20 percent of the $120 million in gains) for a total of $44 million. Our hypothetical fulcrum fund would charge $12.5 million — a management fee of $7.5 million (0.75 percent of $1 billion), and a performance fee of $5 million (25 percent of the 2 percent above-market gain). The breakdown of the $24 million performance fee portion of the traditional hedge fund works out to $20 million for plain old beta and $4 million for alpha. That total is five times more than what the fulcrum shop charges for investment gains.

Now imagine a scenario where the market is up by 10 percent and a fund is up only 8 percent, or has 2 percent underperformance. The traditional hedge fund would have charged $20 million (2 percent of the $1 billion in assets under management) plus a performance fee of $16 million (20 percent of the $80 million in gains) for a total of $36 million dollars. Meanwhile, the fulcrum fund would charge $7.5 million (the 0.75 percent management fee), but it also would give a refund of $5 million (25 percent of the 2 percent, or $20 million, in underperformance). The net charge to clients would be $2.5 million. This is a small fraction of the amount charged by a standard hedged fund.

Why winners keep winning

With that 20% initial advantage, the final market share increases significantly. What is even more amazing is that this advantage was only given in the first round and everything after that was left to chance. If we were to keep increasing the size of the starting advantage, the distribution of final market shares would continue to increase as well.

The purpose of this simulation is to demonstrate how important starting conditions are when determining long term outcomes. Instead of marbles though it could be wealth, or popularity, or book sales. And most of these outcomes are greatly influenced by chance events. We like to think in America that most things come down to hard work, but a few lucky (or unlucky) breaks early on can have lasting effects over decades. If we look at luck in this way, it can change the way you view your life…

I ask you this question because accepting luck as a primary determinant in your life is one of the most freeing ways to view the world. Why? Because when you realize the magnitude of happenstance and serendipity in your life, you can stop judging yourself on your outcomes and start focusing on your efforts. It’s the only thing you can control.