Curated Insights 2018.09.07

A market shakeup is pushing Alphabet and Facebook out of the tech sector

One of the biggest impacts will be on tech—a sector that has grown so big, at 26.5% of the S&P 500, it has produced more than half of the market’s gain this year, according to Bespoke Investment Group. Tech is being cut down to size, though, as several of its biggest stocks head over to the new communication sector. The losses will chop about 23% off the tech sector’s market value. It will be more oriented to chip makers, hardware, and software.

Thankfully, S&P and MSCI don’t make such changes often. The GICS taxonomy goes back to 1999. It has grown to 11 sectors, the latest being real estate, carved out of financials in 2016. But that was minor compared with the new musical chairs—affecting more than 1,100 companies globally.

Redrawing the GICS boundaries was necessary to reflect the changing tech and media landscapes. When the old sector lines were drawn, people made calls with flip phones, used MySpace for social media, and paid AT&T for cellular service and landlines. But mergers and tech developments have jumbled things up: Netflix is threatening Hollywood, Comcast has turned into a media giant, and Alphabet is in everyone’s business. Sure, technology remains the heart of these businesses. But so what? Facebook and Alphabet aren’t like Apple and Microsoft, which develop hardware and software, says Blitzer. It makes more sense to group Facebook and Alphabet with firms making money off advertising, content delivery, and other types of “communications,” he says.

Amazon sets its sights on the $88 billion online ad market

In turn, brands are increasingly recognizing Amazon’s vast customer reach, particularly to its more than 100 million Prime subscribers. In a study conducted last summer by Catalyst, the search and social media marketing company, only 15 percent of the 250 brands marketers polled felt they were making the most out of advertising on Amazon’s platform, and 63 percent of the companies already advertising there said they planned to increase their budget in the coming year.

In India, Google races to parry the rise of Facebook

Facebook ads, compared with those on Google search or YouTube, tend to transcend language barriers more easily because they rely more on visual elements. Pinpointing younger consumers and rural populations is easier with Facebook and its Instagram app.

Facebook and Google between them took 68 percent of India’s digital ad market last year, according to advertising buyer Magna. Media agency GroupM estimates digital advertising spending will grow 30 percent in India this year.

The tension is building between Spotify and the music industry

The easiest way for Spotify to save money would be to cut labels out of the process entirely. While the company has said time and time again that it doesn’t want to operate a label or own copyrights, it has been taking on functions of a record label. The company has developed tools to help artists plan tours and collect royalties, funded music videos and recording sessions, and held workshops with songwriters.

Record companies know Spotify can’t cut them out completely. They control too much music and offer resources artists need. But Spotify’s growth poses a threat. Successful independent artists, like Chance the Rapper, have created the perception that musicians may not need labels at all. “The music industry hates that Spotify, YouTube and Apple Music reduce the relevance of the traditional music business,’’ Masuch said. “Distribution is controlled by companies that aren’t part of the traditional ecosystem.’’

4 reasons Tesla Mobility is worth a lot less than Alphabet’s Waymo

Jonas estimates that Tesla has a 13% discount rate, versus Waymo’s 10%. “Tesla likely has a higher cost of capital vs. Alphabet/Waymo,” he writes.

Tesla will have to make money on the rides themselves, while big tech companies like Alphabet can also make money off the time spent in the car as well as what it learns from drivers. “Tesla’s business model offers potentially less room for adjacent revenue monetization,” he explains.

Tesla has offered very little information on what Tesla Mobility’s business model will look like, while Waymo and General Motors (GM) have “become increasingly conspicuous with their efforts to grow the business with specific targets for commercialization and deployment,” he explains.

More than half the value assigned to Waymo by Morgan Stanley’s internet team came from logistics, by which they apparently mean moving people and stuff around. That’s an opportunity Jonas doesn’t include for Tesla. “Logistics accounts for $89bn of the total $175bn value in our internet team’s Waymo DCF,” he writes. “We have not specifically ascribed any logistics based revenue to Tesla Mobility at this time.”

Lessons from Chance the Rapper (Value chains and profit pools)

“There is what’s called a master and a publishing portion of the record. So the master is the recording of it, so if I sign a record deal or a recording deal, I sign away my masters, which means the label owns the recording of that music. On the publishing side, if I write a record, and I sign away my publishing in a publishing deal, they own the composition of work… so the idea of it, you know what I’m saying? So if I play a song on piano that you wrote, I have to pay you publishing money, because it comes from that idea. Or if I sing a line from that song, it’s from the publishing portion. If I sample the action record, if I take a piece of the actual recorded music, that’s from the master. None of that shit makes any sense right, that shit didn’t make any sense to you? ‘Cause that shit is goofy as hell.”

Peak Valley?

Silicon Valley has always had one important advantage over other regions when it comes to the tech sector. There is a much higher density of talent, capital, employment opportunity, and basic research in Silicon Valley versus other locations. When I say density, I mean physical density. If you walked a mile, how many tech companies would you pass along the way? That metric in Silicon Valley has always been higher than elsewhere and still is. So even though the return on capital (human and invested) has significant headwinds in today’s Silicon Valley, it is still a lot easier to deploy that capital there. And I think that will continue to be the case for a long time to come.

Quantum computing: the power to think outside the box

That could make it easier to design new materials, or find better ways for handling existing processes. Microsoft, for instance, predicts that it could lead to a more efficient way of capturing nitrogen from the atmosphere for use in fertilisers — a process known as nitrogen fixation, which currently eats up huge quantities of power.

When something is familiar and common, you set a low reference point. So most bad outcomes are placed in the “Oh well, you got unlucky. Next time you’ll do better,” category, while all wins are placed in the, “Easy money!” category. Index funds live here. Even in a bad year, no one thinks you’re crazy.
When something is new or unfamiliar, you have no idea where the reference point is. So you’re cautious with it, putting most bad outcomes in the “I told you so” category and most wins in the “You probably got luck” category. When something is new and unfamiliar, the high reference point means not only will bad outcomes will be punished, but some good outcomes aren’t good enough to beat “par.” So even high-probability bets are avoided.

Newcomers

We were doing something different. And anytime you’re doing something different the only people who can participate are people who don’t have career risk. Anytime you introduce the factor of career risk into the decision-making process, you have to do the norm. It’s a divergent system: If you invest in a divergent system and it goes wrong, you have massive downside for your career personally, separate from the organization. It could be the right decision – it was probabilistically a great bet. But if it goes wrong and it looks different, you could get fired. And if it goes right, you still may not have enough upside career-wise.

Deciding whether to do something isn’t just about whether or not it’ll work. It’s not even about the probability of whether it might work. It’s whether it might work within the context of a reference point – some gauge of what others consider “normal” to measure performance against. Thinking probabilistically is hard, but people do it. And when judging the outcomes of decisions, a win isn’t just a win; it’s “You won, but that was an easy bet and you should have won.” Or, “You won, but that was a gamble and you got lucky.”

Curated Insights 2018.08.17

Not enough people are paying attention to this economic trend

Haskel and Westlake outline four reasons why intangible investment behaves differently:

  • It’s a sunk cost. If your investment doesn’t pan out, you don’t have physical assets like machinery that you can sell off to recoup some of your money.
  • It tends to create spillovers that can be taken advantage of by rival companies. Uber’s biggest strength is its network of drivers, but it’s not uncommon to meet an Uber driver who also picks up rides for Lyft.
  • It’s more scalable than a physical asset. After the initial expense of the first unit, products can be replicated ad infinitum for next to nothing.
  • It’s more likely to have valuable synergies with other intangible assets. Haskel and Westlake use the iPod as an example: it combined Apple’s MP3 protocol, miniaturized hard disk design, design skills, and licensing agreements with record labels.

For example, the tools many countries use to measure intangible assets are behind the times, so they’re getting an incomplete picture of the economy. The U.S. didn’t include software in GDP calculations until 1999. Even today, GDP doesn’t count investment in things like market research, branding, and training—intangible assets that companies are spending huge amounts of money on.


How Box conquered the enterprise and became a $1.7 billion company in a decade

However, what most people failed to understand—and continue to misunderstand to this day—is that Dropbox was never launched as a competitor to Box. The use cases were completely different. Box.net and Dropbox may have shared some similar underlying technologies (and an uncomfortably similar name), but the focus of Dropbox was cloud-based file management for the consumer market. Box was focused on file sharing. By the time Dropbox launched in 2007, Box.net had already largely abandoned the consumer market in favor of the enterprise. There were other key differences between the two products, such as the necessity of installing a dedicated Dropbox directory on a user’s local machine versus Box.net’s entirely cloud-based interface. Additionally, the two companies’ target markets and business models couldn’t have been more different.

Levie knew SharePoint was Box’s biggest competitor, so he did what any inventive, irreverent entrepreneur would do—he took out a billboard advertisement on a stretch of highway on Route 101 between San Francisco and Silicon Valley. The ad promised SharePoint users that Box would pay for three months of SharePoint access if they didn’t prefer Box. In February 2009, Box went one step further in its media assault on Microsoft by erecting another billboard, this one highlighting the many aspects of SharePoint that were most unpopular among its user base.

While the enterprise market represented a unique chance for Box to pivot away from the increasingly competitive consumer market, essentially shifting the focus of the entire company was no small undertaking. Until that point, Box had used a freemium business model. This worked fine for the consumer market, but it was completely unsuitable for the enterprise. This meant Box would not only have to radically redesign its product from the ground up but also restructure its entire business model.

By acquiring Increo, Box immediately gained access to Increo’s innovative document collaboration tools. This was crucial. It wasn’t enough for Box to offer cloud-based storage or integrations with Salesforce and Office. It had to offer additional value as competing tools vied for dominance.

The consumerization of enterprise IT driven by Box and other forward-thinking companies wasn’t merely an attempt to cultivate a unique value proposition or drive adoption. It reflected much broader shifts in computing in general. The advent of Web 2.0 apps created a new design paradigm that placed emphasis on ease of use and accessibility across multiple devices over complex file management tools. Smartphones fundamentally changed the way we think of computing. For an enterprise software company like Box to be at the forefront of trends in usability was impressive.

OneCloud was an excellent example of how consumer-focused design informed Box’s broader strategy. The company had built a platform for developers in 2011 known as the Box Innovation Network, which functioned similarly to an app marketplace. OneCloud was an extension of this idea, only it was intended exclusively for mobile devices. This would later become a predictable cycle in Box’s development. New features were added to the product to meet emerging needs, and those features were presented to users in ways that directly mirrored those of consumer apps and sites.

What’s more important, however, is how well Box converted its free users to paid subscribers. Consumer apps like Evernote convert free users to paid plans at a rate of approximately 3%. Box was converting free users to paid plans at a rate closer to 8%, including major corporate customers such as Bank of New York and ambient advertising powerhouse Clear Channel. As a result, Box achieved revenues of more than $11M in 2011.

Because most of Box’s sales calls came from companies that had already been using the product, Box’s sales teams were typically able to close 60% of those deals within two weeks—an impressive figure, especially considering the often months-long sales cycles typically associated with the enterprise market.

Box has done an excellent job of not only carving out its own niche in an increasingly competitive space but also by applying design and UX principles of consumer-focused SaaS products to redefine how enterprise software looks, feels, and works. With its keen focus on usability, ease, and simplicity, Box has become a leading force in the consumerization of the enterprise and has shaped how other enterprise software companies approach their products.

Ad tech firm poised to surge 50%

Bid factoring is essentially a linear equation that enables marketers to apply multipliers to different targeting parameters. This approach makes it easier to value each user individually and dynamically, allowing marketers to more easily reach their target users. Bid factoring saved time for marketers through automation and removed the need to store tons of line item permutations, therefore lowering data storage costs.

When Green started The Trade Desk, his goal was to “build a company for the next 100 years.” He did not want to follow the same mistakes that other companies in the space made such as having a conflict of interest by being on both the buy and sell side. Green decided to build a demand side platform because he believed the demand side of the advertising transaction will always have the advantage. In advertising it will always be a buyer’s market because it is easy to add supply by having an extra impression on a web page or additional 30-second spot to a commercial break to meet increased demand. This basic economic reality means advertising supply is more elastic than demand and will forever put the buy side in the power position.

The Trade Desk would also be transparent and not charge unsustainable take rates. Green believed once the digital advertising industry matures, total transaction costs to purchase a digital ad would be $0.20-$0.30 for every $1.00 spent, with roughly $0.15-$0.20 going to the DSP and $0.05-$0.10 being split between the SSP and the ad exchange. The Trade Desk could have charged much higher take rates but decided to charge customers what it believed would be the fair end-state price for their services. While take rates could become lower as competition potentially increases, similar to what happened with discount stock brokerages, barriers to entry and the DSP’s ability to provide increasing value to advertisers overtime should preserve prices.

As the ad market has grown, the number of auctions has increased exponentially. In order for a DSP to win an auction, it now takes many more looks. For each ad campaign, costs have increased while revenues remained fairly flat, increasing operating leverage. DSPs that have half the ad spend as The Trade Desk will struggle because they will incur the same amount of expense per ad campaign but monetize less, making it much more difficult to be profitable if you are a smaller player and don’t have the scale.

Every day The Trade Desk’s customers log into their platform to use the data and analysis to value ad inventory and run marketing campaigns. Advertisers provide their customer data and publishers provide their user data, which The Trade Desk uses to help advertisers value media for their specific needs. As The Trade Desk accumulates more data over time, its insight and analysis add more value to its customers, creating a self-reinforcing virtuous cycle.


Nvidia’s new Turing architecture is all about real-time ray tracing and AI

Nvidia describes the new Turing architecture as “the greatest leap since the invention of the CUDA GPU in 2006.”

“Hybrid rendering will change the industry, opening up amazing possibilities that enhance our lives with more beautiful designs, richer entertainment and more interactive experiences,” said Nvidia CEO Jensen Huang. “The arrival of real-time ray tracing is the Holy Grail of our industry.”

The new RT cores can accelerate ray tracing by up to 25 times compared to Nvidia’s Pascal architecture, and Nvidia claims 10 GigaRays a second for the maximum performance.

With NGX, Nvidia today also launched a new platform that aims to bring AI into the graphics pipelines. “NGX technology brings capabilities such as taking a standard camera feed and creating super slow motion like you’d get from a $100,000+ specialized camera,” the company explains, and also notes that filmmakers could use this technology to easily remove wires from photographs or replace missing pixels with the right background.


Tesla’s autonomous opportunity is severely underappreciated

We estimate that net revenue for autonomous platform providers – those companies that own the software technology stack for autonomous ride-hailing services – should exceed $2 trillion by 2030, roughly equal to our expectations for automaker revenue at that time. Unlike their auto-manufacturing peers, however, autonomous platform providers should see software-like margins, be less capital-intensive, and enjoy network-effect-driven regional competitive dominance. So, while autonomous platform providers may generate the same revenue as automotive manufacturers, ARK believes these providers will generate six times the operating earnings and consequently will prove to be substantially more valuable. In fact, ARK estimates autonomous platforms will be worth more than the entire $4 trillion global energy sector.

An enhanced Autopilot package with the ability to self-drive costs $5,000 upfront or $6,000 for customers who choose to wait and buy later. Payment for this feature alone can be thought of as nearly pure profit on every Tesla sold. In addition, once Tesla launches the Tesla Network, its autonomous ride-hailing network, it could collect platform fees, similar to Uber’s model today, from every autonomous ride charged to the consumer. Given a rate of $1 per mile to the end consumer and over 100,000 miles per year per vehicle, Tesla could benefit from $20,000 in high-margin platform fees per car per year. Over a five-year lifetime, a single Model 3 could generate $40,000 in net cash flow. Even investors optimistic about Tesla’s prospects project the Model 3 cash flow at $4,000 and one-time in nature. In effect, each Model 3 sale could generate 10 times more cash flow than investors currently understand.

Google’s targeted ads are coming to a billboard near you

Digital outdoor ad spending is growing at 15 percent annually, and will overtake traditional outdoor outlays by 2020, according to PwC. But Google is the 800-pound gorilla that’s not yet in the room. It would give the company another major edge over Facebook, which doesn’t have the same access to location-based mobile data.


Alibaba tweaks a controversial legal structure

There are three problems with VIEs. First, key-man risk. If the people with nominal title die, divorce or disappear, it is not certain that their heirs and successors can be bound to follow the same contracts. Second, it is not clear if the structure is even legal. China’s courts have set few reliable precedents on VIEs and the official position is one of toleration rather than approval. Third, VIEs allow China’s leading tech firms to be listed abroad, preventing mainlanders from easily owning their shares and participating in their success.

Alibaba’s proposed change is aimed at tackling the first problem, key-man risk. At the moment four of its five VIEs are nominally owned by Jack Ma, the firm’s leader, and Simon Xie, a co-founder and former employee. After the restructuring, the two men will no longer be the dominant counterparties. Instead the VIEs will be owned by two layers of holding companies, which will sign contracts with Alibaba. These holding companies will ultimately be nominally owned by a broader group of Alibaba’s senior Chinese staff. The idea is that if anyone gets run over by a bus, then the scheme will not be disrupted, because nominal control is spread among a wider group of people. The new approach is far from perfect but it is an improvement. If all goes to plan it will be completed by 2019. Other tech firms may feel pressure to follow.

$1b+ market map: The world’s 260 unicorn companies in one infographic
60+ startups disrupting IKEA in one market map

SoftBank’s Son says WeWork is his ‘next Alibaba’

It is rare for Son, who casts a wide net with his startup investments, to commit so much resources to a single company. But he said WeWork is more than just a renter of office space: it is “something completely new that uses technology to build and network communities.”

The use of shared space to forge connections is not unique to WeWork. The company’s edge lies in the steady flow of data it collects on members, which is shared with other locations and can be accessed by users of the WeWork app around the world. The idea is that more data means more innovation — a model that underlies Son’s excitement about the company.

What MoviePass can teach us about the future of subscription businesses

Pricing is so powerful that playing with it requires great skill and precision. MoviePass should have done its price experimentation at the outset and on a local basis. It could have optimized the price points and tested alternative pricing models quietly, instead of jerking millions of customers around. Even a slight tweak — such as moving to a club pricing model like Costco’s — might have solved its cash-flow problems.

These kinds of tweaks could also have enabled the company to consider regional pricing strategies, given that its cost of goods (the full price of movie tickets, which it pays theater operators) varies from $8 in Nebraska to over $15 in New York. This case is also a good reminder that the United States has local profit pools. It is silly to think that a one-size-fits-all national strategy is the right approach for a market as ethnically and economically diverse as the United States.

MoviePass failed to recognize how the behavior of superconsumers, customers who are highly engaged with a category and a brand, differs from that of average consumers — and how, if not anticipated, this difference can create problems for a company’s cost model. It can especially be a problem if the company uses a “buffet” model of fixed price and unlimited quantities, as MoviePass did.

Quantum computers today aren’t very useful. That could change

Quantum computers are, however, far more prone to errors than binary machines. Instead of using electric signals to generate a series of zeros and ones like a conventional computer, quantum computers rely on the real-world, mechanical behavior of photons, which are packets of microwave energy. The machines require a complex, multi-layered refrigeration process that brings quantum chips to a temperature just above absolute zero. By eliminating certain particles and other potential interference, the remaining photons are used to solve computational problems. The true magic of this system is how photons can become entangled and produce different but related results. Scientists only partially understand why it works the way it does.

A quantum chip doesn’t look like much with the naked eye. Through an optical microscope, though, you can see the quantum logic gate that makes everything possible. The team here is working on a process of stringing together 16-qubit chips to execute on the 128-qubit design. Essential to this is a new kind of quantum chip that communicates results in three dimensions instead of the current two, which allows Rigetti to fit the chips together like puzzle pieces and turn them into a single, more powerful computer. “What we’re working on next is something that can be scaled and tiled indefinitely,” Bestwick said.

Why the future belongs to ‘challenge-driven leaders’

The consensus view of Mr. Marchionne, relayed by hundreds of tributes, is that he possessed an unusual blend of vision, technical expertise, analytical rigor, open-mindedness and candor. The remembrances also agreed on something else: he was a bona fide eccentric. “God bless you, Sergio,” Morgan Stanley analyst Adam Jonas told Mr. Marchionne during a January conference call. “We’re never going to see anyone like you again.”

The trajectory of great ideas

“Being right is the enemy of staying right because it leads you to forget the way the world works.” – Jason Zweig. Buddhism has a concept called beginner’s mind, which is an active openness to trying new things and studying new ideas, unburdened by past preconceptions, like a beginner would. Knowing you have a competitive advantage is often the enemy of beginner’s mind, because doing well reduces the incentive to explore other ideas, especially when those ideas conflict with your proven strategy. Which is dangerous. Being locked into a single view is fatal in an economy where reversion to the mean and competition constantly dismantles old strategies.

Survivorship bias on wheels

One last thing: When it was introduced as new in 1984, the 1985 Testarossa listed for $90,000 (but dealers charged huge premiums over list due to “Ferrari fever.”) You can still find Testarossas for that original list price — meaning the net returns over 43 years has been precisely zero — before maintenance, storage and repair costs.

As a comparison, in 1985, the benchmark S&P500 was about 200, and it closed yesterday at 2,821.93. That generated an average annual return of about 8.5%, returning 1,400% price appreciation since then, and, with dividends reinvested, over 3,000% total return (in nominal terms, like the chart above, neither is adjusted for inflation).

Selecting investments after the fact is easy; ask yourself this question: What car do you want to buy as an investment for the next 34 years to be sold in 2052?


Curated Insights 2018.07.20

Professor Aswath Damodaran on valuation

The most egregious valuation mistake that I see investment professionals make is mistaking pricing for valuation. Most investment professionals don’t do valuation, they do pricing. What I mean by that is that you price a number to a stock based on what other people are paying for similar stocks. Any time you use a multiple comparable you’re not valuing the company, you’re pricing a company. Ninety percent of the time, when someone says “I’ve valued a company at X”, I always have to stop and ask them, “What do you mean value the company?”. Most of the time when I extract the answer, the answer is that they’ve really priced the company. There’s nothing wrong with pricing. But it’s not valuation. Valuation is about digging through a business, understanding the business, understanding its cash flows, growth, and risk, and then trying to attach a number to a business based on its value as a business. Most people don’t do that. It’s not their job. They price companies. So the biggest mistake in valuation is mistaking pricing for valuation.

The biggest mistake is that VCs don’t value users, they price them. What I mean by that is that if there’s a line of VCs and you go up to a VC and say “I have a million users”, the VC says “Amazing, I’ll pay you $1 Billion”. Most VC’s are still pricing users, with the assumption that all users have value, and that all their data is going to be useful. And I think that’s a dangerous thing. The reason I wrote that paper is to illustrate that users can be valuable, but users can be useless. Moviepass users are useless – there are a lot of them, but I don’t think the marginal Moviepass user adds any value. In fact, I think that they destroy value, because you’re giving them a service for way below cost. Netflix users, are clearly much more valuable as a commodity. I think that we have to differentiate between users, and to do that we have to start asking serious questions about what separates good users from bad users, what separates valuable users from useless users.

Well it’s massively impacted prices. It’s going to mean that there’s going to be a lot more splitting up of the market, like with Uber and Didi in China, and with Uber and Grab’s agreement in Southeast Asia. I think increasingly that the ridesharing companies think that the future lies in each of them carving out markets for themselves where they don’t face competition. Softbank incentivizes that by being invested in all of these companies. Uber, Lyft, and Grab fares will start to go up, and you can thank Softbank for that. They’re the ones in the background impacting how this business is evolving.

It’s a feature not a bug. It’s the nature of young companies and young markets, that you will overvalue them, because you’re looking at clusters of what I call overoptimism. Each cluster, be it the VCs and employees of a company think that they have the answers to the big questions. It’s how markets evolve, and I think that it’s a healthy process. I think that bubbles are not always bad, because they’re what allow us to change and move on. So I think that you can look at bubbles as a bad thing and try to make them go away, but I think that they’re a good feature of markets and allow us to shift from one business to another, from one technology to another.


How internet advertising can grow to $600 billion by 2023

While digital direct response advertising took share from print in the first leg of internet, digital video advertising could take share from TV in the second leg. What would be the impact on budgets of sustained strong growth in internet advertising? If you assume compounded growth rates of 15% for Google, 20% for Facebook, 20% for China, and 12% for everyone else, internet advertising would reach $620 billion by 2023—a figure that’s larger than the entire global advertising market today.

One might say that that is sufficient proof that internet advertising must slow down less it exceeds its total addressable market. But it’s just as dangerous to assume that the size of advertising market is a static number or a fixed percent of global GDP.

Amazon in particular has potential to contribute out-sized growth. Already roughly half of US consumers start their product search on Amazon, bypassing Google’s most important search ads. These shoppers see Amazon’s sponsored product ads which are highly valuable and result in direct measurement of sales. Amazon’s $3 billion ad business is growing quickly and could dampen Google’s search business in the coming years.

Analysts and investors have historically underestimated the size of the internet advertising market and continue to do so based on a static set of assumptions. Yet, more than any other medium, internet advertising has evolved and re-invented itself constantly. The drivers of growth today – mobile, video, and programmatic – barely existed ten years ago. There’s no telling what the next ten years might bring.


Texas to pass Iraq and Iran as world’s No. 3 oil powerhouse

Texas is pumping so much oil that it will surpass OPEC members Iran and Iraq next year, HSBC predicted in a recent report. If it were a country, Texas would be the world’s No. 3 oil producer, behind only Russia and Saudi Arabia, the investment bank said.

The combined output of the Permian and Eagle Ford is expected to rise from just 2.5 million barrels per day in 2014 to 5.6 million barrels per day in 2019, according to HSBC. That means Texas will account for more than half of America’s total oil production. By comparison, Iraq’s daily production is seen at about 4.8 million barrels, while Iran is projected to pump 3 million. Oil supplies from Iran are likely to plunge due to tough sanctions from the United States.


Beijing did a tech reality check on its industrial champions. The results were not amazing

The ministry questioned the companies about 130 “core components and materials”, finding them reliant on imports for 95 per cent of central processing unit and CPU-related chips for their computers and servers. The companies also depended on foreign suppliers for 95 per cent of the advanced manufacturing and testing components on production lines for various sectors, including rockets, large aircraft and even cars, according to the report published on Friday. About a third of the “key materials” covered by the survey were not available in China, the state news agency reported, without detailing the items covered or when the survey was conducted.

Google fined a record $5 billion by the EU for Android antitrust violations

While many had expected Google to face its own “Microsoft moment,” the EU doesn’t seem to be forcing any strong future oversight on Android or asking Google to modify its software to include a ballot for alternative browsers or search engines.

This decision seems to be more about preventing Google from bundling its services to Android, than forcing the company to change Android significantly. Phone manufacturers will still be free to bundle Chrome and Google search apps if they wish, but they won’t be forced to do so, and they’ll be free to offer devices with forked versions of Android.

Amazon’s share of the US e-commerce market is now 49%, or 5% of all retail spend

The figures are also remarkable not because of their size, but because of Amazon’s pace has not slowed down. Its sales are up 29.2 percent versus a year ago, when it commanded 43 percent of all e-commerce retail sales.

The rocket ship for Amazon’s growth at the moment is its Marketplace — the platform where Amazon allows third-party sellers to use its retail and (if they choose) logistics infrastructure to sell and deliver items to Amazon shoppers. It’s currently accounting for 68 percent of all retail sales, working out to nearly $176 billion, versus 32 percent for Amazon’s direct sales, and eMarketer projects that by the end of this year, Marketplace’s share will be more than double that of Amazon’s own sales (it’s already about double).


Amazon set for Prime Day ad revenue bonanza

The need to advertise to cut through the crowd on Prime Day underscores the growing contribution of advertising to Amazon’s business. While its Amazon’s core retail operations generate the majority of its revenue, executives and analysts see advertising as a promising growth area. Its “other” revenue segment, mostly derived from advertising, more than doubled to $2bn in the first quarter and the company flagged the high-margin business as “a strong contributor to profitability”.

Amazon’s slice of the $100bn US digital ad market is still very small: 2.7 per cent, or fifth place, this year compared with Google’s 37.2 per cent and Facebook’s 19.6 per cent, according to eMarketer. Its share is expected to reach 4.5 per cent by 2020, passing Microsoft and Verizon’s Oath to climb to third place, while Google and Facebook are predicted to lose ground.


Mark Mahaney, analyst at RBC Capital Markets, estimates that by 2022 Amazon’s ad revenues will top $25bn and generate more than $8bn in incremental operating profit, making the business “as impactful” to the company as Amazon Web Services, its cloud computing business, is today.

Travel giant Booking invests $500M in Chinese ride-hailing firm Didi Chuxing

Besides Booking.com and Agoda, Booking also operates Kayak, Priceline.com, Rentacars.com and OpenTable, all of which makes it a powerful ally for Didi. That’s particularly important since the Chinese firm is in global expansion mode, having launched services in Mexico, Australia and Taiwan this year. Beyond those three, it acquired local ride-hailing company 99 in Brazil and announced plans to roll into Japan.

Beyond boosting a brand and consumer touchpoints, linking up with travel companies makes sense as ride-hailing goes from simply ride-hailing to become a de facto platform for travel between both longer haul (flights) and short distance (public transport) trips. That explains why Didi has doubled down on dock-less bikes and other transportation modes.

Reuters reports that the unit, which was formed in April and consists of Didi’s car rental, sales, maintenance, sharing and gas services businesses, could be spun out in a deal worth $1.5 billion. The thinking is apparently that Didi’s IPO, which is said to be in the planning stages, would run smoother without these asset-heavy businesses involved.


Spotify’s new tool helps artists and labels reach its playlist editors

The company says that, today, more than 75,000 artists are featured on its editorial playlists every week, plus another 150,000 on its flagship playlist, Discover Weekly.

These days, artists and labels ask for intros to playlists editors, believing that getting to the right person will give them an edge in having their tracks selected for a playlist. The new submissions feature aims to change this process, while also driving artists and labels to use Spotify’s own software for managing profiles and tracking their stats on the service.

We want to make something crystal clear: no one can pay to be added to one of Spotify’s editorial playlists. Our editors pick tracks with listeners in mind. They make these decisions using data about what’s resonating most with their community of listeners.

What are cobots? Understanding the newest wave of smart robot reinventing whole industries

Now, incumbents are playing catch-up against Teradyne’s cobot division Universal Robots (UR), which currently claims around 60% of the cobot marketshare. Big names like ABB, Fanuc, Yaskawa, KUKA, and Robert Bosch, which are all better known for their low-tech robots, have followed UR into the cobot market. (It’s estimated that Fanuc has between 6% and 10% of cobot market share, and Yaskawa’s is even smaller.) And partnerships are springing up: Kawasaki is now working with its Swiss rival ABB to standardize robotic programming.

One big reason could be labor costs rising worldwide. Because of economic growth, wages in industrialized countries have soared. In China, for example, average wages have more than doubled since 2006, and the country is no longer considered a destination for low-cost outsourcing. In fact, China is now so expensive that it’s losing consumer electronics jobs to lower-cost neighbors like Vietnam, pushing its robot demand to grow more than 20% just last year.

Expensive labor is also tilting the scale for more localized manufacturing, and robotics are enabling a new wave of re-shoring (the return of manufacturing to the United States). In a 2015 survey by BCG, 20% of US-based manufacturers surveyed said they were actively shifting production back to the US from China, or were planning to do so over the next two years. The majority said lower automation costs have made the US more competitive.

Subsequently, firms are increasingly turning to cobots, which these days are easily programmable, cheaper than traditional labor, and even inexpensive compared to “dumb” robots. For all of these reasons, cobot makers are selling more units at lower prices than ever before.

How has the average US house size changed?

Over the past 95 years, average [residential home] floor area has increased from 1048 square feet to 2657 square feet, which equates to a 2.5x increase. Furthermore, the average floor area per person has more than quadrupled, from 242 square feet to 1046! Essentially, it’s likely that one person nowadays has the same amount of space as a family back in the 1920s.

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 2018.05.27

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 2018.04.15

Mark Zuckerberg: “We do not sell data to advertisers”

There is a very common misconception that we sell data to advertisers, and we do not sell data to advertisers. What we allow is for advertisers to tell us who they want to reach and then we do the placement. So, if an advertiser comes to us and says, ‘Alright, I’m a ski shop and I want to sell skis to women,’ then we might have some sense because people shared skiing related content or said they were interested in that. They shared whether they’re a woman. And then we can show the ads to the right people without that data ever changing hands and going to the advertiser. That’s a very fundamental part of how our model works and something that is often misunderstood.


Sen. Harris puts Zuckerberg between a rock and a hard place for not disclosing data misuse

So to sum up: in 2015, it became clear to Facebook and certainly to senior leadership that the data of 87 million people had been sold against the company’s terms. Whether or not to inform those users seems like a fundamental question, yet Zuckerberg claimed to have no recollection of any discussion thereof. That hardly seems possible — especially since he later said that they had in fact had that discussion, and that the decision was made on bad information. But he doesn’t remember when this discussion, which he does or doesn’t remember, did or didn’t take place!


Google and Facebook can’t help publishers because they’re built to defeat publishers

Here’s the problem: No matter how hard Google and Facebook try to help publishers, they will do more to hurt them, because that’s the way they’re supposed to work. They’re built to eviscerate publishers.

Publishers create and aggregate information and present it to users in return for their attention, which they sell to advertisers. And that’s exactly what Google and Facebook do, too: Except they do a much better job of that. That’s why the two companies own the majority of digital ad dollars, and an even bigger chunk of digital advertising growth. (Yes, those numbers can change — but if anyone displaces Google or Facebook, it will be another tech company.)

Amazon’s next mission: Using Alexa to help you pay friends

Mr. Bezos gave employees a mandate last year to push financial services as a key initiative, according to a person briefed on the matter. The company also restructured internally to add its digital wallet, Amazon Pay, to its team that focuses on Alexa as part of plans to make voice commands the next wave of commerce, according to other people familiar with the company’s plans.

If Amazon can move more transactions to its own rails or get better deals from card companies, it could save more than an estimated $250 million in interchange fees each year, Bain & Co. consultants say.


Is Amazon bad for the Postal Service? Or its savior?

An independent body, the Postal Regulatory Commission, oversees the rates that the Postal Service charges for its products. By law, the agreements it cuts with corporate customers like Amazon must cover their “attributable costs” that directly result from their use of the postal network.

While the Postal Service is subject to Freedom of Information Act requests, there is an exemption in the federal law that allows it to avoid releasing particulars of its deals with private businesses like Amazon.


Amazon is not a bubble

Thanks to its significant time-lag between selling an item and paying a supplier (estimated at 80 days by Morningstar) Amazon has been able to self-fund its growth almost entirely from cash from operations over its 25-year corporate history. In fact they last tapped the equity markets for funding in 2003, and in the last quarter of 2017 reported $6.5bn of free cash flow.

Ensemble Capital Q1 2018: Netflix

In the US, it has more subscribers than all of the cable TV companies combined, and it has a penetration rate of about 40% of all US households. And it’s still growing. Based on its massive global subscriber base, Netflix is now the 2nd largest pay TV service in the world behind just China Radio & TV. Yet Netflix is still growing subscribers at a 20% clip.

None other than the “Cable Cowboy”, John Malone, the business genius who pioneered the development of cable TV, shares our view on this topic. Talking to CNBC last year, Malone said that the most important question in the TV industry is “Can Netflix get enough scale that nobody really can challenge them?” and then went on to say that in his opinion the traditional pay TV companies no longer have any chance of overtaking Netflix. When the interviewer asked if the pay TV industry could band together to create their own Netflix-like service as Malone had been urging for years, he simply replied “It’s way too late.”


Apple now runs on 100% green energy, and here’s how it got there

At the moment, this conversation involves a healthy dose of education. “What we say is that we’ll be there with you,” Jackson recounts. “We’ll help you scout deals, we’ll help you evaluate whether they’re real, we’ll help you know what to negotiate for, because most of these folks, they’re trying to make a part, and so what we can do for them is be sort of their in-house consulting firm.” But she adds that there will likely come a time where Apple will require suppliers to run their businesses on clean energy as a condition of a business relationship.


[Invest Like the Best] Pat Dorsey Return – The Moat Portfolio

Chegg is a company we own right now where the historical data looks awful and it’s because they just sold a business, and the performance of this asset intensive textbook rental, that’s what’s in the historical data. The performance of the asset light, super high incremental margin study business is buried in the segment results…

The legacy business for Chegg is textbook rental…of course, this is a business that’s fairly easily replicable, there are very low barriers to entry and so Amazon and Barnes and Noble essentially crushed them in the textbook rental business. The founders were fired by the venture capitalists who poured $220mn into the business, a new CEO was brought in, and he realized that the only asset Chegg had at that point was a brand. They had 60%, maybe 70% unaided name recognition on college campuses…so, they invested in a bunch of other businesses and the one that’s worked out really well for them is essentially building a digital library of step-by-step answers to end of chapter study questions. So, if you took engineering or math or organic chemistry, there’s going to be a series of questions at the end of the chapter, so did you understand what you just read, and if you didn’t you probably won’t do so well on the test. What they’ve done is gotten exclusive licenses for 27,000 ISBNs and answered every single question and indexed it on Google, that being pretty important because the college student today copies and pastes. They copy the question and they put it in Google and search on it. Chegg comes up as the first organic result, which is how their user base has gone up 2.5x in 3 years with marketing costs being the same as they were 3 years ago…

Now Chegg has to pay money, big money, for those licenses to get that content, and so to some extent the publishers – Pearson and McGraw Hill – do have a lever over Chegg in that respect. We think those relationships are good, they recently renewed one of their licenses at similar cost to what it was a few years ago, largely because the publishers themselves are struggling and this is a very high margin source of income for them. And most college students, they’ve never heard of Pearson, that name means nothing to them. So if Pearson were to take all their textbooks and try to do this themselves, we think the marketing costs would be enormous…you do have some crowd sourced competitors to Chegg, where students basically post their own answers but here’s the thing. When you think about the value to a student of getting a 3.5 instead of a 3.0 GPA or passing a certain class that’s required of their major, the marginal benefit of paying $14.95/month for Chegg and knowing it’s the right answer…vs. just crowd-sourcing it on reddit, it’s a good cost-benefit.

So Workiva, they have 96% client retention, 106% revenue retention because they keep upselling clients. And what they did is create a product that lets companies do SEC filings much more efficiently than the old way, which was mark up a pdf and send it to RR Donnelley and the Donnelley sends it back to you and then you mark it up and send it back to them…so needless to say, [Workiva] went from 0% to 50% share in 6 years. In fact, the people who do external reporting – they’ve got 80% share of the Fortune 500 right now – people actually won’t go to work for another firm that doesn’t use Workiva…

It’s not an easy product to create because essentially what they had to do was replicate Excel in the cloud and enable it for scores of simultaneous users. There’s no check-in/check-out the worksheet. And then also the data points get linked inside your enterprise and so you might way we need to report this EBIT line, well that’s the function of Bob here and Jane over there, and their numbers roll up into mine and I link that inside my enterprise, so if you had a new product you’d have to break all those links and re-integrate it. So, not impossible but external reporting teams, even Wal-Mart, a huge company, their external reporting team’s like 20 people, so it’s feasible to do a rip-and-replace. But where things get interesting for this business and where the TAM gets much larger is internal reporting, where you’re rolling up data across the entire enterprise and then putting it together for the CFO/CEO or whatever, because then the linkages get much greater and the number of users becomes much bigger and the more users you have within an entity whose workflow would be disrupted if you got a new product, the stickier the product becomes…

In Workiva’s example, their customer acquisition costs really spiked about a year and half, two years ago because instead of going after the broader internal reporting market, they tried to pivot going from the SEC market to the Sarbanes Oxley market, SOX reporting, which didn’t work very well because with external reporting you were just saying ‘hey, you should just use Wdesk instead of Donnelley or Merrill…our product is superior’. Customer goes ‘why, yes it is.’ There is no SOX product, there is no product for SOX reporting, it’s a whole bunch of cludged together internal processes, so that’s a much harder sale, going in and saying ‘pay money for a product that is replacing an internal process that you’re not actually paying money for, it’s just sort of wasting people’s time’. That’s harder to put a number on if you’re a CFO or CEO, so that really spiked up their customer acquisition costs. Once they pivoted back to enterprise sales and frankly just reorganized their sales force geographically instead of functionally – which means less travel – customer acquisition costs came back down.

The U.S. states most vulnerable to a trade war

How to understand the financial levers in your business

Whatever your business, build a business model that includes all of your assumptions — and build the model so you can pressure-test variables and find your levers. Once you’ve identified them, build MVPs to test those assumptions in more detail. It’s really important to experiment early and get some good data on what works (and what doesn’t), before you start ramping up and pouring lots of money into marketing and execution. Some changes can have exponential effects — for better or for worse.

Want to keep your wine collection safe? Store it in a bomb shelter

Shipping wine in the country is tightly controlled by a web of state laws, and it is illegal for individuals to ship wine themselves across state lines. Having wine storage in different states can ensure that collectors get the wine they want regardless of where they live.

Storage fees can be as low as $1.25 a month per case of wine, which holds 12 regular bottles or six magnums. Of course, wine collectors rarely store just one box, and they are not putting it there for just a month.


What it takes to out-sleuth wine fraud

Ms. Downey offered advice and provided counterfeit-detection tools for seminar participants, including a jeweler’s loupe, a measuring tape, a UV light and UV-visible pens. She outlined her authentication process, which begins with careful scrutiny of the wine bottle—the loupe proved handy here—notably the label, the paper it’s printed on and the printing method and ink, as well as other components such as the capsule and the cork. Ultra-white paper, detectable under UV light, wasn’t in commercial use until the 1960s. With the aid of a microscope, one could detect if the paper was recycled, which would mean the wine couldn’t have been produced before the 1980s, when recycled paper was introduced for labels.

Above all, she emphasized that wine fraud isn’t a victimless crime. “It affects people who work very hard to make good wine, who are proud of their wines and their appellation,” she said. “It ruins their reputation and it destroys all their hard work.” With the right tools and a gimlet eye, she believes, we can all play a part in protecting that work.

Curated Insights 2018.02.04

Ingvar Kamprad, Ikea’s Swedish billionaire founder, dies at 91

Kamprad was known for driving an old Volvo, recycling tea bags and taking home little packets of salt and pepper from restaurant visits. He was known as “Uncle Scrooge” and “The Miser” in the Swiss village of Epalinges, near Lausanne, where he moved in the 1970s before returning to Sweden a few years ago. He also avoided wearing suits and ties and traveled coach when flying.

Ikea’s corporate culture mirrors Kamprad’s celebration of frugality. Executives of the company travel on low-cost airlines and lodge in budget hotels. Its employees follow a basic pamphlet written by Kamprad in 1976, “The Testament of a Furniture Dealer,” which states that “wasting resources is a mortal sin,” and stipulates Ikea’s “duty to expand.”

The name Ikea is made up of the founder’s initials and the first letters of the Elmtaryd farm and Agunnaryd village where he was raised. His flat-pack furniture was invented by Ikea employee Gillis Lundgren in 1956 when he tried to fit a table into the back of a car. Realizing the table was too bulky, Lundgren removed the legs. Storing and selling Billy book shelves or entire kitchens in pieces has let Ikea cut storage space and fill its trucks with more goods. The concept of having customers pick up most of their own furniture in adjacent warehouses and transport it home for self-assembly also helped drive down costs.

How Amazon’s ad business could threaten Google and Facebook

But Amazon has a huge set of data that Facebook and Google can’t access—namely, its own. Already, more than half of all online searches for products start on Amazon, and of those a majority end there, according to various surveys. That figure has grown every year that pollsters have tracked it.

The Amazon Advertising Platform lets advertisers manage ad buys across multiple advertising exchanges, and it has quietly become as familiar to marketers as its equivalent from Google-owned DoubleClick.

Amazon also needs to expand the number of places it can sell advertisements, which is one reason the company bought videogame-streaming behemoth Twitch and is investing so heavily in its own streaming-video offerings.

How Apple built a chip powerhouse to threaten Qualcomm and Intel

…by designing its own chips, Apple cuts component costs, gets an early jump on future features because it controls research and development and keeps secrets away from frenemies such as Samsung…Those ultimately failed or stumbled because chip-making is the sport of kings: It’s brutally expensive and requires massive scale. Apple has wisely focused on designing its silicon (for its system on a chips, Apple uses reference designs from Arm Holdings Plc). Manufacturing is left to others, including Taiwan Semiconductor Manufacturing Co.

An investment pro who’s seen it all still sees upside for stocks

Over 40% of Standard & Poor’s 500 revenues now comes from abroad.

No other country is shrinking its equity base to the extent we are. We’re now in our ninth year of share buybacks equal to 3% of the market value of all S&P 500 stocks, based on Laszlo Birinyi’s work.

For 20 years, the average price/earnings ratio has been 19.3. If you go back 50 years, it’s 15.6 times. In periods where inflation grew 3% or less—which is 22 of the past 50 years—the P/E of the market was 19.7.

AlphaZero and the curse of human knowledge

Using self-play to recursively improve an agent’s ability to play a game isn’t new. Why hasn’t this method yielded a champion chess or Go engine until 2017? Historically, systems that improve via self-play have been very unstable. Previous attempts often ended up in cycles, forgetting and relearning strategies over and over rather than improving to superhuman levels. Or sometimes the agent would get stuck, failing to improve after achieving moderate success.

AlphaZero’s main contribution was solving these problems. After lots of experiments, DeepMind developed a series of new tricks and discovered a value function and tree search that reliably learned through self-play alone. They then leveraged their engineering talent and infrastructure resources to demonstrate that the system could work on the massive scale required to master complicated games such as chess and Go (the version that played Stockfish employed 5,000 custom machine learning chips).


Even if you knew the cards…

One of the (many) reasons I stopped heeding the macro forecasts of others and quit trying to come up with my own is that even if you knew what the future data would be, you’d still not be able to predict how people would react to it. You could certainly try, but markets are set up to confound us, not confirm our hypotheses.

Curated Insights 2017.12.03

A dynamic knowledge tool to understand the issues and forces driving transformational change across economies, industries, global issues and the Forum’s system initiatives.

How to tame Google, Facebook, Amazon, and Apple

The problem with price regulation is that Google doesn’t charge high prices—at least not to consumers, the traditional victims in monopoly cases. The company initially helped wipe out the profitability of newspapers and magazines, in part, by undercutting the price of print advertising. These days, however, Google can charge hefty prices to advertisers because it controls so much inventory and user data. Advertisers can feel they have no choice but to pay up, while consumers pay precisely zero to do searches or send emails.

Amazon is a “cheetelephant,” said one analyst: an elephant that runs as fast as a cheetah. It’s considerably faster than the regulators and lawmakers who have been caught flat-footed and are now wondering what, if anything, to do about its increasing market power, from books to groceries to moviemaking.

“If you look at the business models of these firms, none of these is a predatory pricing model. These firms are making a lot of money doing what they’re currently doing,” said Penn’s Hovenkamp. Besides, he said, “there are constantly new entrants” that would prevent a company from earning monopolistic profits. For antitrust enforcers, the problem is that by the time you know for sure whether a company predatorily drove rivals out of business, it’s too late to prevent it.

Facebook, in other words, is damned if it does censor and damned if it doesn’t. How is this likely to evolve? One possibility is that Facebook will tire of taking the heat and voluntarily submit to government regulation. A regulated Facebook would still have to employ people and algorithms to scour its website of forbidden materials, as it does today, but at least it could point the finger at lawmakers and regulators if questioned about its choices. The same would go for Google and some companies not covered here, such as Twitter.

It’s a good bet that there will be more such orders in coming years. Governments want money, and the four tech giants have a lot of it. In the meantime, while trying to come up with a better tax system, Europe is toying with the idea of taxing the tech companies’ revenue rather than their profits. The reasoning is that revenue is harder to manipulate. But revenue is a crude measure of a company’s ability to pay taxes. Revenue-based taxation would be too hard on companies with lots of revenue but little profit, and too easy on companies with little revenue but lots of profit.

Under an apportionment system, each country is still permitted to set its corporate tax rate however it chooses. But it will be able to charge its rate only on its little slice of the company’s global profit—a slice that’s determined by an agreed-upon formula. A country can no longer grab a bigger piece of a shrinking corporate-tax pie by cutting its rate below other countries’. In one stroke, the race to the bottom in tax rates is cut short.

Getting low-tax countries to go along with an apportionment system would be tough, though. No country wants to give up what makes it special. So something like the current tax system, albeit with fewer loopholes, is likely to persist for at least awhile. Apple, Google, Facebook and Amazon will keep finding ways to pit countries against one another.


Why Tencent Could Become an Advertising Powerhouse Like Facebook

Tencent’s ad revenue could more than double to $11.4 billion by 2019, according to researcher eMarketer. The company is estimated to increase its market share in China’s digital ad space to 15 percent from about 9 percent, eMarketer said.

Social advertising, which relies on information from a user’s network, is still a nascent business in China. The model that drives Facebook only accounts for about 10 percent of mainland digital marketing with e-commerce and search ads still taking the lion’s share. Lau expects that to change. “Social advertising can play a larger role,” said Lau. “In China, we are kind of pioneering the categories” of that.

So Tencent’s chosen to exercise restraint, usually showing just one ad per day on WeChat’s “Moments”, a function similar to Facebook’s news feed, capping inventory by intention. That’s why it earns just $2.10 per daily active user on WeChat, versus Facebook’s $30.10, Morgan Stanley estimates.

To do that, it’s enlisted an army of more than 250 computer scientists to expand in artificial intelligence, focusing on natural language processing, image recognition and user behavior prediction. That investment is showing up in some areas: Tencent worked with BMW to target high-end users based on their friends and location logs, sending them WeChat ads through which they could book test drives. The end game is converting ads into purchases, which is why the company’s exploring also hotels, dining and property, Lau said.


How Tencent could help Snapchat

Integrating gaming into Snapchat might be a good idea – not just because it creates more ways to generate revenue, but also because it can enhance user engagement. Globally, more people watch gaming videos and streams than HBO, Netflix, ESPN, and Hulu combined. As Snapchat strives to add users globally, it would be smart to tap into the millions of gamers worldwide who are already spending hours each day playing games, many of which Tencent has invested in.

“There is a strong likelihood that the redesign of our application will be disruptive to our business in the short term. We’re willing to take that risk for what we believe are substantial long-term benefits to our business.”


Amazon focuses on machine learning to beat cloud rivals

The industry has turned into a race to provide customers tools and functions to use that data in new ways. Those tools are helping speed the transition to the cloud, since companies that don’t have access to them will be at a competitive disadvantage, Jassy said. “We are in a transition stage right now. Relatively few companies will own their own data centers, and those who do will have significantly smaller footprints. That means all of that data is moving to the cloud.”

The cloud computing market will grow to $89 billion in 2021, up from $35 billion today, according to technology research firm Gartner Inc.


Amazon AWS: Is that what the second headquarters is about? Asks Goldman

“While Amazon has never discussed any plans for a spin or any HQ2 plans relative to AWS, it is possible that the location of the new headquarters could provide some insight into the way management is thinking about the positioning of AWS.”

Terry’s curiosity is piqued by the fact that Amazon increasingly competes in the same industries that are customers for AWS, including gaming, healthcare and life sciences. Presumably, a separation of AWS might lessen the conflict there. Terry sees AWS being worth $430 billion, on a sum-of-the-parts basis, equaling 60% of Amazon’s enterprise value.


Broadcom could bid as much as $100 for Qualcomm and still see a payoff, says Canaccord

We assume Qualcomm settles its licensing dispute with Apple with Apple paying roughly half of what it previously paid Qualcomm for iPhone royalties. We also assume Qualcomm settles its dispute with Huawei or the other large OEM currently not paying Qualcomm royalties. We believe Broadcom management has solutions for Qualcomm’s disputes as part of its reasoning to make a bid for Qualcomm, but we have used these assumptions based on our Qualcomm scenario analysis used for our Qualcomm price target in our last published Qualcomm note. We also assume $500M in synergies achieved between Qualcomm and NXP in our scenario analysis including NXP. Further, we assume a 4% interest rate on combined debt for an acquisition with NXP and 3.5% for an acquisition without NXP given larger debt levels needed if the acquisition includes NXP. We also assume $1.5B in F2019 synergies between Broadcom in Qualcomm and a combined company tax rate of 15%.


Beyond Tesla’s semi truck: The future of trucking and transportation

We are currently entering a period of a rapid change in our transportation systems. And as I see it, it’s the innovator’s dilemma playing out in the wild: Incumbents like General Motors are moving too slowly to adapt to an all-electric future—wasting billions of dollars on stock buybacks—while upstarts like Tesla, unencumbered by legacy business models, are forging a path into a clean, fully-electric, fully-autonomous future. (GM has spent almost $17 billion in the last several years buying back its stock, three times what Tesla has spent building Gigafactories.)

One is that the cost of trucking falls by at least 50%, if not more. No driver, double the passive productivity, and in essence, you eliminate most of the safety problems. And by the way, if you apply this [autonomous] technology, many of the concerns we have from a safety standpoint about large trucks go away and you can make the trucks bigger. So, the costs fall at least in half. Transit time falls at half too, because you’re not waiting.

Let’s look at it from a technical standpoint. There are two competencies that keep trucking firms alive. The first one is their ability to match demand and supply; which is very important, and the second is their ability to manage drivers. There’s a modest competency with respect to equipment, but it’s not that important. Well, in the first place, if you if you eliminate the drivers, you eliminate half of the value-added that the trucker provides. And second, if you go to integrated big data, the business of matching capacity to demand becomes much easier. So, what it does is it either eliminates, or dramatically changes the principal competencies of whatever we call this entity which we now call “trucker” provides to the marketplace. So it’s big, big changes.


Why Tesla’s fuel efficiency advantage won’t last

At the early part of the 2000’s trucks getting 5 mpg were common. Today’s fleet is more like 7 mpg. That two miles per gallon increase means diesel used falls from 20,000 gallons a year down to under 15,000 gallons. Best-in-class trucks today might approach 9-10 miles per gallon. That three mpg increase versus fleet average (presumably what Tesla used in its cost calculator) is another 30% drop in fuel use, down to 10,000 gallons. The SuperTruck programs that get 12 or more mpg, (using many of the same aero techniques that Tesla’s Semi uses) would use around 8,000 gallons of fuel. In other words the opportunity to lower the Tesla cost of ownership with fuel savings is currently 15,000 diesel gallons a year, but will soon enough be only half that, using current line-of-sight technologies. At current fleet average diesel costs the savings opportunity on 100,000 miles per year is $37,500 per truck. At current best-in-class the available pool of offset-able fuel cost is $25,000. On future trucks, perhaps not too far distant from Tesla’s launch, is only $20,000 per year. All this assumes you can run a truck 100,000 miles a year in 300 to 500 mile increments.

The future difference between Tesla’s astonishing 19 mpg equivalent and the SuperTruck 12 mpg is only 3,000 gallons a year of diesel equivalent. Compared with the 7,000 gallons per truck per year already in the diesel improvement pipeline, that 3,000 gallons doesn’t look as compelling.


Inside the revolution at Etsy

Inside Etsy, Mr. Silverman’s reorganization has upended parts of the company once considered sacrosanct. Last month, Etsy changed its mission statement. Gone was a verbose commitment “to reimagine commerce in ways that build a more fulfilling and lasting world.” Instead, the mission was reduced to just three words, “Keep commerce human,” accompanied by a spreadsheet outlining its goals for economic, social and ecological impact. And because remaining a B Corp would require the company to change its legal standing in Delaware, where it is incorporated, Etsy will let that certification lapse.


Paytm aims to become largest full-service digital bank

“Digital payments was our entry point, we want to become a vertically-integrated financial services company.”

Payments banks can accept deposits and remittances but cannot lend. Paytm is one of less than a dozen entities that got permits to start payments banks to bring financial services within easy reach of about a fifth of India’s 1.3 billion people who do not have access to organized financial services.

Paytm Payments Bank is majority-owned by Sharma. One97 Communications, which is backed by Alibaba Group Holding, Ant Financial Services and others, holds the remaining 49 percent. The payments bank morphed out of Paytm’s digital wallet which got a huge boost and amassed over a hundred million customers after India took its high currency bills, totaling nearly 90 percent of the value of cash, out of circulation last November.

Sharma may have found a way around the regulatory hurdles that bar lending. One97 Communications will introduce a charge card and offer monthly installment-based loans, he said. “We will launch share trading and insurance products very soon,” said Sharma. “We want to become an Internet-age financial services company.”

Business lessons from Ben Thompson of Stratechery

“Zero distribution costs. Zero marginal costs. Zero transactions. This is what the Internet enables, and it is completely transforming not just technology companies but companies in every single industry.” “Aggregation Theory is a completely new way to understand business in the Internet age.”

“instead of some companies serving the high end of a market with a superior experience while others serve the low-end with a “good-enough” offering, one company can serve everyone…. it makes sense to start at the high-end with customers who have a greater willingness-to-pay, and from there scale downwards, decreasing your price along with the decrease in your per-customer cost base (because of scale) as you go (and again, without accruing material marginal costs). Many of the most important new companies, including Google, Facebook, Amazon, Netflix, Snapchat, Uber, Airbnb and more are winning not by giving good-enough solutions to over-served low-end customers, but rather by delivering a superior experience that begins at the top of a market and works its way down…”

“Apple and Amazon do have businesses that qualify as aggregators, at least to a degree: for Apple, it is the App Store (as well as the Google Play Store). Apple owns the user relationship, incurs zero marginal costs in serving that user, and has a network of App Developers continually improving supply in response to demand. Amazon, meanwhile, has Amazon Merchant Services, which is a two-sided network where Amazon owns the end user and passes all marginal costs to merchants (i.e. suppliers).”

“Once an aggregator has gained some number of end users, suppliers will come onto the aggregator’s platform on the aggregator’s terms, effectively commoditizing and modularizing themselves. Those additional suppliers then make the aggregator more attractive to more users, which in turn draws more suppliers, in a virtuous cycle. This means that for aggregators, customer acquisition costs decrease over time; marginal customers are attracted to the platform by virtue of the increasing number of suppliers.”

“Breaking up a formerly integrated system — commoditizing and modularizing it — destroys incumbent value while simultaneously allowing a new entrant to integrate a different part of the value chain and thus capture new value.”


Active vs. passive vs. Amazon et al.

“Sectors such as finance, information technology, media, and pharmaceuticals — which have the highest margins — are developing a winner-take-all dynamic, with a wide gap between the most profitable companies and everyone else.”

“I have long described Amazon as a Field of Dreams company, one that goes for higher revenues first and then thinks about ways of converting those revenues into profits; if you build it, they will come. In coining this description, I am not being derisive but arguing that the market’s willingness to be patient with the company is largely a result of the consistency with [which] Jeff Bezos has told the same story for the company, since 1997, and acted in accordance with it.”

“These models have an in-built structure where they are going to tip into winner-take-all areas. The cost of adding a new user gets smaller and smaller the bigger you get. [This starts] creating a competitive advantage that gets harder and harder to bridge.”

It’s not unusual for a few stocks to drive broader market performance in a given year, but we would be foolish to ignore that it has been the same several stocks quite frequently in recent years. Facebook, Apple, Amazon, Netflix, and Google are responsible for roughly 20% of the S&P 500’s performance this year, and generated more than the entire return of the index in 2015.


The secret to tech’s next big breakthroughs? Stacking chips

The advantage is simple physics: When electrons have to travel long distances through copper wires, it takes more power, produces heat and reduces bandwidth. Stacked chips are more efficient, run cooler and communicate across much shorter interconnections at lightning speed.

Chip stacking enables totally new capabilities too. Some phone cameras stack an image sensor directly on top of the chip that processes the image. The extra speed means they can grab multiple exposures of an image and fuse them together, capturing more light for dim scenes.

But Mr. Dixon-Warren says the spread of 3-D chips is rapid and their takeover inevitable. A decade ago, this technology was limited almost exclusively to university labs; five or six years ago, it was still hard to find commercial examples. But now it’s popping up all over, in applications like networking and high-performance computing and in high-end wearables like the Apple Watch.


How does Costco sell 18-year-old single malt Scotch for $38?

“Costco has a volume deal with [spirits] companies including Edrington and Diageo. They agree to buy a certain amount of product at a certain price, which is far lower than everyone else is paying. For products like Johnnie Walker Blue or Macallan, it’s virtually impossible to beat Costco on price.”

“If Costco can control the importation of the whisky, get someone to distribute it to them at cost (or at very slim single-digit margins due to high volume) and then sell it at very low margins, then they’re golden.”

Finally, one reason rarely considered for why Costco might be able to offer better pricing is proof. Typically, whisky connoisseurs would want that 25-year-old Scotch to have some decent heft after all those years of concentrating in barrel. Alcohol is a conduit for flavor, after all. But all Kirkland Signature Scotches are sold at 80 proof, meaning that these whiskies are watered down to the absolute lowest legal limit and, thus, Costco is able to empty barrels into way more bottles.


Big oil and auto makers throw a lifeline to the combustion engine

The new lubricants are meant to help auto makers build smaller, turbocharged engines that are still quite powerful, resulting in efficiency gains close to 15% compared with older models. Optimizing internal combustion engines could boost efficiency by an additional 25%—a calculation that might tempt auto makers from spending more on electric-vehicle technology. Other efforts to enhance performance include adding gears to transmissions and making vehicles more aerodynamic.

The gains from engine oil alone are limited, however. Industry experts say the latest lubricants typically boost fuel economy by less than 1%, primarily by reducing the amount of energy needed to pump a piston. Even so, it is a highly cost-effective solution that adds up when spread across millions of vehicles.


‘It’s beautiful’: This Toronto startup is investors’ secret weapon to beating the market

Legal experts say investors may be risking more than their capital when using such alternative data since case law hasn’t yet determined what crosses the line into privacy violations or insider trading, but it’s a risk a growing number of financial institutions are willing to take, especially since in Apache’s case, and many others, it has paid off.

“That is the original alpha source, knowing something the market doesn’t know. It’s beautiful,” he said. “If you can come to them with a genuine information advantage, where they can know something their peers in the market do not know that’s tradable, that’s hugely valuable.”

Quandl is particularly interested in companies that produce what it calls “exhaust” data, or data collected as part of a company’s normal operations without intending to turn it into a revenue source. For example, insurance companies keep records of how many new car insurance policies they sell, as well as which vehicle manufacturer’s model is being insured, which happens to be a great predictor of new car sales before the automakers release the data themselves.

But Quandl faces a dilemma after convincing suppliers to sell their data: the more clients the company sells the data to, the less of an investing edge it provides, making it less valuable. To solve that problem, Quandl uses the data to build a predictive model to make an educated guess about how much money could be invested before the data loses its advantage and then sells it to a limited number of clients accordingly.


About 11% of land in Japan is unclaimed

That’s about 41,000 square kilometers (16,000 square miles), which is equivalent to the size of Japan’s southwestern island of Kyushu, or almost as large as Denmark. By 2040, land equivalent to Japan’s second-largest island of Hokkaido will be unclaimed or abandoned, according to a panel of experts and government representatives. This will cost the nation roughly 6 trillion yen ($54 billion) over the period 2017-2040, including lost development opportunities and uncollected taxes, the panel says.

“Land prices are falling in the depopulating regions,” Yamanome said. “Not only is it impossible to make money by owning some land, but also you can’t get rid of it because regional real estate markets are stale.”


Great products vs. great businesses

A product is something that solves someone’s problem. A business is a product that works so well that people will pay more than it costs to produce.

But losses come in different flavors. There is a difference between a company that loses money because it’s investing in the infrastructure needed to become a profitable company, and a company that loses money because it can’t charge customers a price that reflects what it costs to run the business. But we often conflate the two, treating all loss-making startups with a sense of, “It’s OK, they’re growing.”

Companies are staying private longer than they used to. So venture investors that specialize in the early phase of big-losses-because-we’re-investing-in-what-it-takes-to-build-a-profitable-business have found themselves holding mature companies that in a different era would have been passed onto investors who demanded a sustainable business model with profits. In any other era, Uber, Airbnb, Pinterest, and others all would have been public companies by now. And public markets almost certainly wouldn’t let losses pile up for as long as they have. We’ve seen this with Blue Apron and Snap, whose shares have fallen between 50% and 70% since going public just months ago. Both make amazing products that attracted armies of users, which VC investors oogled over. But public investors took one look at their business models and said, “What the hell is this?!” Who knows what that means for their future as standalone companies.


Pricing power: Delighting customers vs mortgaging your moat

The problem with this source of pricing power is that it comes with an off balance sheet liability. A sort of “negative goodwill” that grows every time you increase prices. While the profits might roll in for awhile, one day the customers will revolt. At the very least, the perceived excessive pricing of the well water will create a huge incentive for customers to try any new competitor that comes to town. While the high pricing makes it look like the company has a competitive advantage, in fact the excess returns are being created by a process that increases the likelihood of a successful competitive assault sometime in the future.


Lessons from a legendary short seller

“Because I never wanted to get up in the morning hoping that things would be getting worse. All intellectuals I think — and I don’t use that as a particularly flattering term — but all intellectuals tend to have a pessimistic streak.”

“I would forget the shorting. I think it’s over. It’s over for one simple reason: If shorts start working, that is, stocks go down for any sustained period of time, a great many people who are not now shorting will start shorting. There is a limited supply of stocks to borrow to sell short. Those stocks that are good shorts tend to be very obvious. As I’ve often said, I can predict with confidence that you’ll die. I cannot predict that you’ll be born, and so failure is analytically obvious and everybody piles into the same short. . . . I do believe if shorting really becomes profitable again, it’s going to become so crowded that most people won’t be able to borrow stock.”

Pulling iron from brain may offer hope in Alzheimer’s fight

The familiar metal is key to numerous brain functions, but too much of it is toxic. Researchers in Melbourne showed two years ago that iron levels in the brain can predict when people will get Alzheimer’s disease. Now, the team aims to show how removing excessive amounts with a drug called deferiprone can stave off the memory-robbing disorder.


Laptops are great. But not during a lecture or a meeting.

Laptops distract from learning, both for users and for those around them. It’s not much of a leap to expect that electronics also undermine learning in high school classrooms or that they hurt productivity in meetings in all kinds of workplaces.