Curated Insights 2020.01.24

The man who’s spending $1 billion to own every pop song

What Mercuriadis is doing with Hipgnosis isn’t so much innovative as it is opportunistic. With a fertile contact list from his decades as an artist manager, the ability to raise at least another billion from investors, and a healthy amount of hubris, he located an opening in the music industry and is going all-in on exploiting it. Ultimately, his goal with Hipgnosis — which went public on the London Stock Exchange in June 2018 — is to own 15% to 20% of the overall publishing market. “Everyone that writes songs today can be confident that the financial community understands that as these songs become proven, they are predictable and reliable,” Mercuriadis says.

When Spotify launched in 2008, Mercuriadis became intrigued by streaming music. Central to Spotify’s user experience was the ability to create personalized playlists by culling songs from all genres and artists. The start-to-finish thread of a full album was becoming less important to streaming adopters. In decades past, he observed, the majority of artists wrote their own songs. Kurt Cobain wrote all the lyrics and much of the music for Nirvana’s 1991 album, Nevermind. Contrast that with Adele, who worked with 10 different songwriters for her 2015 smash, 25. “It became clear to me that the power was shifting from the artist to the songwriter,” Mercuriadis says. “But the songwriters weren’t in a position to reap the benefits.”

With Hipgnosis Songs Fund, Mercuriadis bypassed all of them. Songwriters are able to generate revenue from three sources: mechanical royalties (the sale or legal download of a song), performance royalties (paid every time a song is heard in public, whether it’s a live performance, on TV, or in a movie; played in a bar or restaurant; or streamed), and synch fees (song licensing for use in movies, video games, and commercials). Mechanical royalties are the only stream with a set rate; performance and synch royalties are negotiated percentages. Synchs are often more lucrative for the songwriter, since they generally split 50% for the writer and the artist, with the label taking its cut from the artist’s piece of the pie. Synch is where Hipgnosis Song Fund could make them money, as Mercuriadis explained to the 177 hedge fund and private investors he pitched between 2015 and 2018.

Today, the business operates like a cross between an investment fund and a talent management agency. While Mercuriadis brokers the catalog deals, each of his 19 employees is responsible for monetization opportunities for a portfolio of songs. He plans to at least double the number of people working for him this year. “I want to get rid of the word ‘publishing,’” he says. (His preferred description: “song management.”) “Major publishers have small staffs working with hundreds of thousands of songs. We’re shooting for thousands of songs and having synch managers who are each responsible for a much smaller amount,” he says. “We’ll make a lot more money than anyone else.”

Pincus acknowledges that Hipgnosis may have other deals in the works that would offset the high prices he’s paying — and indeed, Mercuriadis is working on diversifying beyond songwriter catalogs. The company just purchased the masters of UK band the Kaiser Chiefs, which gives it complete ownership of the recordings. Purchasing producers’ rights is another new point of emphasis. Mercuriadis bought Jeff Bhasker’s inventory (the Grammy’s 2016 Producer of the Year behind “Uptown Funk”), along with the entire 1,855-song output from Brendan O’Brien, best known for his work with Pearl Jam. There are also the merchandising possibilities: Mercuriadis’ yet-to-be-announced mega-deal with that iconic female artist reportedly includes, in addition to the thousands of songs the artist has written, the use of her image and likeness. This deal will cost Mercuriadis well into the nine figures but has the potential for him to eventually sell more T-shirts than the Gap.

Outdoor advertising market poised to eclipse newspapers

The so-called “out of home” segment accounts for about 6.5 per cent of the $600bn global advertising market but stands out as the only traditional media that continues to grow as others give ground to Google and Facebook.

In 2020 advertisers will spend $40.6bn on outdoor posters and “street furniture”, about $4bn more than on newspapers, according to estimates from GroupM, the media buying agency. By 2024 GroupM expects outdoor advertising to exceed spending on newspapers and magazines combined, having expanded at an annual rate of between 2.5 and 4 per cent.

There’s a link between hiking the minimum wage and declining suicide rates, researchers say

State-level increases of $1 in minimum wage corresponded with a 3.4 percent to 5.9 percent decrease in the suicide rates of people with a high school diploma or less in that age group. Emory University researchers analyzed monthly data from all 50 states and the District of Columbia between 1990 and 2015.


As jobs cap 10 years of gains, women are workforce majority

Women overtook men to hold the majority of U.S. jobs for the first time in a decade, while employers added positions for a record 10th straight year, pointing to a growing and dynamic economy heading into 2020.

The number of women on nonfarm payrolls exceeded men in December for the first time since mid-2010, the Labor Department said Friday. Women held 50.04% of jobs last month, surpassing men on payrolls by 109,000.

Curated Insights 2020.01.03

Food delivery: Delivering growth, but can they deliver profits?

From the first half of 2017 to the first half of 2019, the total food sales (gross merchandise value (“GMV”)) of listed food delivery platforms in the Western Hemisphere (Uber Eats, Just Eat, Takeaway.com, Delivery Hero, Grubhub) has grown from around US$6.5bn to around US$18bn. In China, the scale is incredible, with Meituan Dianping’s GMV expected to grow from around US$24bn in the 2017 financial year (“FY”) to around US$55bn this year, reaching an annualised run-rate by the end of the year of close to 10bn separate food orders. Further, Alibaba’s Ele.me, which is China’s #2 food delivery platform, will likely enable around US$30bn of transactions this year.

So far Meituan Dianping is the only delivery-led company (delivery makes up approximately 65% of orders) to have turned a modest profit helped by favourable market conditions such as a consolidated market, scale far beyond its Western peers (Chinese orders per capita is approximately 5x vs the US) and easing competitive pressures from competitor Ele.me. This raises questions around whether the model is sustainable in the West.

Our unit economics calculations in various markets suggest that food delivery could theoretically be profitable, provided markets consolidate and rationalise. On average, delivery platforms should make positive gross profits (revenue less delivery costs per order) managing the delivery for independent restaurants e.g. Deliveroo reported a gross margin of greater than 20% in FY17 and FY18[vii]. The bigger question is whether the marketing and promotional costs needed to acquire new customers and incentivise restaurants and riders will begin to fall. Just like the marketplace businesses before them, when the market matures and consolidates to one or two platforms, most of these costs should subside and delivery could yield modest profits. Meituan Dianping is a good example of this, moving from a lossmaking position to slightly profitable in recent quarters as the market consolidated and competitive pressures from Ele.me abated.

Furthermore, most investors and commentators are also ignoring several other key risks. First, food delivery companies, like other tech companies, are the subject of increased scrutiny from regulators for exploiting their market positions. There is a real risk that the unit economics get worse, as regulators force the platforms to cut the commissions they charge independent restaurants and pay riders more. Second, large restaurant chains (e.g. McDonalds) receive very favourable terms from the delivery platforms due to the boost they give to the frequency with which customers use the delivery app. This hurts the economics for the delivery players as they likely lose money on each McDonald’s order. Finally, the business model is untested through the cycle. We often find ourselves wondering if consumers would really be willing to pay $5 to have a $10 Big Mac meal delivered during a recession.

Why Americans are always running out of time

Electric stoves made food prep faster. Automatic washers and dryers cut the time needed to clean a load of clothes. Refrigerators meant that housewives and the help didn’t have to worry about buying fresh food every other day.

Each of these innovations could have saved hours of labor. But none of them did. At first, these new machines compensated for the decline in home servants. (They helped cause that decline, as well.) Then housework expanded to fill the available hours. In 1920, full-time housewives spent 51 hours a week on housework, according to Juliet Schor, an economist and the author of The Overworked American. In the 1950s, they worked 52 hours a week. In the 1960s, they worked 53 hours. Half a century of labor-saving technology does not appear to have saved the typical housewife even one minute of labor.

2020 startup themes

Ad companies are governed by a rule as durable as gravity: they must make their products worse over time. Corporations must produce profit, and the fastest path to increase revenue is at the cost of user experience. Amazon and Google used to feel powerful and sleek. Now they’re like Costco on Black Friday. Noisy, tacky and ad-riddled. And more profitable! (For now.)

This increase in revenue comes at the cost of long-term customer satisfaction, but nobody knows how to really measure that, so investors don’t care. Now Instagram has too many ads and finding a genuine phone charger on Amazon requires a degree in investigative journalism.

Are concert tickets too cheap? Ticketmaster thinks so

The average ticket price for the top-100 world-wide tours rose to $96.17 in 2019, according to music-industry trade publication Pollstar, and has increased 23% in the past five years. Since 1996, the average price for a top-100 tour ticket in North America has climbed more than 250%, according to Pollstar statistics recently cited by Bloomberg News. Though big-name artists command higher prices, “the vast majority of shows are very reasonably priced for fans,” Berchtold said, pointing to amphitheater lawn seats priced in the $30 range. Live Nation said in its Liberty investor presentation that ticket prices for its amphitheaters average $48.

Georgetown University finance professor Jim Angel agrees with Ticketmaster that concert tickets are cheaper than they could be. Concert tickets have historically been underpriced, he said, in part to build fan buzz and loyalty while keeping the artist from looking greedy. “It’s sort of like how investment bankers underprice initial public offerings,” he said. “They want to make sure that the investors have a good experience and that there’s no unsold stock left at the end of the offering.”


Apple ink supplier in Japan makes mark with iPhone 11 Pro colors

In 1972, the company formed a technical alliance with a U.S. ink producer that boasted advanced screen printing technology, which allows for printing on a wide variety of materials. The partnership helped Seiko Advance enhance its own screen printing techniques — still the core of its expertise. Even so, Kabe recalled that the visit to Apple revealed a “very different world.” Suppliers were expected to meet hundreds of criteria. “At that time,” he said, “we found that we couldn’t meet Apple’s high standards.”

After four years of trial and error, the company finally began supplying black ink for iPhones. Now Apple accounts for nearly 40% of its sales, while it also supplies major global smartphone competitors like Samsung Electronics and Huawei. Its inks are mainly used for high-end phones. Inks for appliances, sign boards and vending machines account for the rest. Although the company declined to provide numbers, it said sales are growing, and that becoming an Apple supplier was a major boost.

Seiko Advance has a cleanroom in its factory. Hiraguri says it is the only ink company in the world that has one. This gives it a competitive edge, as controlling temperature and humidity keeps the ink under stable conditions and helps ensure consistent quality.

Skilled workers are equally important. Seiko Advance has 30 experts who specialize in color compounds. They produce 150 colors per day and check them one by one, manually.

Can the American casket monopoly be disrupted?

According to the Casket & Funeral Supply Association of America (CFSA), there were more than 700 casket companies in 1950; by the early 2000s, that figure had been whittled down to 147. Today, Batesville and Matthews dominate the market, making up for more than 8 of every 10 casket sales in the US.

Some estimates suggest that the final price of a casket is anywhere from 300% to 500% more than the cost of making it. In recent years, much cheaper alternatives have become available. Amazon, Walmart, and Costco all sell caskets at around $1k — less than half the average price of caskets from Batesville or Matthews. Yet, even these juggernaut corporations have struggled to chip away at the casket monopoly. Why? Because Batesville and Matthews have strong relationships where casket buying happens: in funeral homes.

The main deterrent for casket competitors is that they aren’t selling caskets where consumers buy them. According to a 2019 IBISWorld report, 82% of caskets are purchased through funeral homes, who capitalize on mourning families by selling them the most expensive products they carry.

We’ve just had the best decade in human history. Seriously

The next time you hear Sir David Attenborough say: ‘Anyone who thinks that you can have infinite growth on a planet with finite resources is either a madman or an economist’, ask him this: ‘But what if economic growth means using less stuff, not more?’ For example, a normal drink can today contains 13 grams of aluminium, much of it recycled. In 1959, it contained 85 grams. Substituting the former for the latter is a contribution to economic growth, but it reduces the resources consumed per drink.

As for Britain, our consumption of ‘stuff’ probably peaked around the turn of the century — an achievement that has gone almost entirely unnoticed. But the evidence is there. In 2011 Chris Goodall, an investor in electric vehicles, published research showing that the UK was now using not just relatively less ‘stuff’ every year, but absolutely less. Events have since vindicated his thesis. The quantity of all resources consumed per person in Britain (domestic extraction of biomass, metals, minerals and fossil fuels, plus imports minus exports) fell by a third between 2000 and 2017, from 12.5 tonnes to 8.5 tonnes. That’s a faster decline than the increase in the number of people, so it means fewer resources consumed overall.

Extreme aging

Japan now has over 70,000 people who are more than 100 years old.

In 1975 social security and healthcare spending commanded 22 percent of the country’s tax revenues; by 2017 the figure, driven up by elderly care and pensions, had risen to 55 percent. By the early 2020s the figure is set to hit 60 percent. To look at it in another way, every other public service in Japan — education, transport, infrastructure, defense, the environment, the arts–could rely on almost 80 percent of tax revenue in 1975, but the increase in elderly-related spending means that only 40 percent is left for other national public expenditures. In budgetary terms, ageing is eating Japan.


Rank-and-file workers get bigger raises

Pay for the bottom 25% of wage earners rose 4.5% in November from a year earlier, according to the Federal Reserve Bank of Atlanta. Wages for the top 25% of earners rose 2.9%. Similarly, the Atlanta Fed found wages for low-skilled workers have accelerated since early 2018, and last month matched the pace of high-skill workers for the first time since 2010.

Hedge funds record best year since 2013 but still trail market

After failing to capture much of 2019’s strong rally in stocks and bonds, the hedge fund industry has delivered an overall return of 8.5 per cent this year, according to data from HFR. Although it is the best performance in six years, it is still well behind the S&P 500’s 29.1 per cent gain this year. The US bond market, measured by a Bloomberg Barclays index, returned 14.5 per cent. 

The relative underperformance raises further questions about hedge funds’ ability to make money in all market conditions: they lagged this year’s bull market but also fared worse than the market during 2018’s sell-off, despite having the ability to bet on falling prices.

Building a rocket is hard. But building a parachute is boggling

Parachutes were so precious to the Apollo program that only three people in the nation were qualified to hand-pack the parachutes for the Apollo 15 capsule: Norma Cretal, Jimmy Calunga and Buzz Corey, who in 1971 — the year of that mission — all lived in Ventura County. Their expertise was so vital, they were not allowed to ride in the same car together for fear that a single auto accident could cripple the space program.


Top speed is overrated

I can drive my Prius from NY to Syracuse faster than I can fly there. Even though a plane has been engineered to have a much higher top speed, the door to door costs of travel (security theatre, parking, checking in, the rest of the last mile once I land) aren’t impacted at all by the top speed of the chosen form of transport.

Top speed is easy to measure and fun to work on. But for most of the people you work with, there are dozens of factors that matter more than the easily measured versions of top speed that are talked about.


Does happiness in your 50s signal the end of ambition?

“This is about realizing that we’re going to die one day and being more selective in who we spend time with [and] fully accepting that we’ll never achieve many things,” says Arthur Stone, professor of psychology, economics, and health policy and management at the University of Southern California. He adds that these realizations tend to leave people with smaller but more enriching social circles, a predilection toward happiness over hassle and a higher likelihood of general contentment.

Curated Insights 2019.11.22

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

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

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

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

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

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

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

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

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

Alibaba aims to deliver with $16bn courier venture

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

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

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

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

The beauty of Singles Day

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


Why Nike quit Amazon, but doubles down on Tmall

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

Balsa shortage threatens wind power rollout

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

BlueMountain: the hedge fund that lost its way

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

Curated Insights 2019.11.01

GrubHub shareholder letter (October 2019)

A common fallacy in this business is that an avalanche of volume, food or otherwise, will drive logistics costs down materially. Bottom line is that you need to pay someone enough money to drive to the restaurant, pick up food and drive it to a diner. That takes time and drivers need to be appropriately paid for their time or they will find another opportunity. At some point, delivery drones and robots may reduce the cost of fulfillment, but it will be a long time before the capital costs and ongoing operating expenses are less than the cost of paying someone for 30-45 minutes of their time. Delivery/logistics is valuable to us because it increases potential restaurant inventory and order volume, not because it improves per order economics.

Earlier, we talked about the great progress we are making with enterprise brands. We love working with large enterprise brands because they help drive new diners to our platform and keep diners from going to other platforms. That said, the biggest enterprise brands don’t need Grubhub to bring them new diners in the same way independents and small chains do because they spend billions a year on developing their own brands. What they need most is a driver to take the food to their diners. And, as we just noted, that isn’t cheap, or particularly scalable, so the unit economics and long term profit outlook for our business would look very different if a majority of our business was coming from large enterprise brands.

Life of pie: A closer look at the Domino’s Pizza system

The key to operating a successful Domino’s master franchise is to have the Domino’s brand stand out against all the other pizza options that are available in the marketplace. In other words, the brand has to be put to work to generate demand, which can only be achieved with significant marketing spend. Tv is still quite important for Domino’s and generally requires a significant advertising budget. That budget has to be levered on a good number of restaurants in order to make sure the marketing expenses stay at a reasonable level per store.

Every new market that’s entered starts more or less from scratch, with limited consumer awareness and entrenched behavior that benefits the incumbents. This is why it is so difficult for a new Domino’s market to get to a scale that makes economic sense. Once you manage to reach that scale that the flywheel can start spinning, because at that point the business can self-generate its growth through reinvestment in marketing.

It appears that the entire Domino’s franchise has come under a bit of pressure from aggregators like Takeaway, Uber Eats, Grubhub and Doordash, which are oftentimes operating at a loss. Since the aggregators are providing access to technology platforms that many small operators would not be able to afford or operate on their own, they’ve essentially levelled the playing field for pizza restaurants again. In my opinion this has decreased Domino’s Pizza’s advantage in the mobile ordering space. Domino’s Pizza Inc.’s CEO conceded recently that the aggregators are indeed having an effect on their same store sales growth (item below). For now I have no strong conviction on Domino’s but it is a business with some fascinating developments.

Schwab kills commissions to feed its flywheel of scale

“ we did not expect such a swift reaction in the sense that we thought that we come out with IBKR Lite as an additional offering and that we go on for a while, and will attract some customers and then eventually, other people will start reducing and maybe all go to zero. So this — this very swift reaction was a surprise to us.” – Thomas Peterffy, Founder and Chairman, Interactive Brokers Group (IBKR), 3Q 2019 Earnings Call

We believe Schwab’s business stands to benefit the most because of the relatively small impact to its revenue and income and the broad, efficient set of high quality service it offers to clients. While the commission cuts mean Schwab offers an even more compelling value to its customers for its existing suite of high quality services, a disadvantaged competitor like TD Ameritrade is trying to figure out how to charge for its “premium” services for customers, effectively raising prices for service in other ways and depressing its value proposition.

Decades of experience indicates the companies offering higher value propositions win more customers. By continuing to pursue aggressive reinvestment in both client service and technological efficiency, Schwab can continue to leverage its growing scale to further improve upon the value proposition it provides clients while continuing to drive down its expense (efficiency) ratio. We believe the gap in differentiation will only get wider now that the smaller competitors are much weakened financially, which is why it made sense for Schwab to be so aggressive in cutting commissions both in 2017 and again October 2019.

An Elastic technical review

Elastic isn’t building a cloud side and a on-prem side to their platform like MDB is. It’s all Elastic Stack in the Elastic Cloud, just hosted at whatever cloud provider the customer desires, and managed by the finest experts one could find — thems that wrote it! There isn’t tooling appearing in Elastic Cloud that isn’t in core platform, unlike MDB with their Stitch serverless platform. However, the downside is that their Elastic Stack releases must bundle the proprietary modules side-by-side with the open-source products.

One striking difference as I walked through the product line, is the number of use cases it solves that DO NOT INVOLVE CODE. MDB is for developers only, to embed into their application stack. Elastic is for that, but also for non-developers to use without needing any custom development. IT can hook up Beats for monitoring infrastructure or network traffic. Enterprise users can feed in datasets with Logstash, for staff to query, visualize, or apply ML in Kibana. I expect this trend to continue, as it really opens up the applicability as to who can use the product line.

Best of all, Elastic is making exciting moves that are moving their company beyond being a do-it-yourself tool provider.


Third Point’s Q3 letter: EssilorLuxottica thesis

Our analysis of potential merger synergies points to over €1 billion in additional profit through efficiencies and revenue growth, almost double the Company’s current targets. In the near‐term, this will be driven by cross‐selling to wholesale customers, insourcing lens procurement, and supply chain efficiencies. The longer‐term opportunity to disrupt the industry value chain is even more appealing: combining lens and frame to shrink raw material need and waste, reducing shipping costs by merging prescription labs with global distribution hubs, and providing a true omni‐channel sales offering. These initiatives will transform the way glasses are sold, significantly improving the customer experience.


Ensemble Capital client call transcript: Mastercard update

While you might hear about how merchants pay 2% or more in credit card fees, Visa and Mastercard are only collecting about 1/20th of that fee, with the banks, the ones taking the credit risk, earning the bulk of the fee.


Ensemble Capital client call transcript: Tiffany & Co update

Tiffany is one of just a few global American luxury brands and the casual observer cannot tell a Tiffany diamond engagement ring from one purchased elsewhere. There’s no room on a diamond for logo placement, after all.

As a company, Tiffany is older than Cartier (founded in 1847), Louis Vuitton (founded in 1854), and Burberry (founded in 1856). This durability matters in luxury because it communicates a brand’s ability to endure all kinds of major socioeconomic changes and remain relevant over successive generations. It also communicates a certain timelessness of core products that remain in fashion despite intermittent fads and trends.

The advertising industry has a problem: People hate ads

“It’s harder to reach audiences, the cost of marketing is going up, the number of channels has exponentially proliferated and the cost to cover all of those channels has proliferated,” Jay Pattisall, the lead author of the report, said in an interview. “It’s a continual pressure for marketers — we’re no longer just creating advertising campaigns three or four times a year and running them across a few networks and print.”

That includes automation and machine learning technologies, which Forrester expects will transform 80 percent of agency jobs by 2030. In July, JPMorgan Chase announced a deal with the ad tech company Persado that would use artificial intelligence to write marketing copy.

Steven Moy, the chief executive of the Barbarian agency, said that multiyear contracts had shortened, with budgets tightening and performance metrics becoming more stringent.

For the first time ever next year, Facebook, Google, YouTube and other online platforms are expected to soak up the majority of advertising dollars, according to WARC.

Last year, 78 percent of members of the Association of National Advertisers had an in-house agency, up from 58 percent in 2013 and 42 percent in 2008.

Curated Insights 2018.12.14

The Facebook Fed

I think a good analogy is that Facebook is the Federal Reserve of web publishing. It can turn its dial and blast millions of visitors to numerous publishers, allowing everyone to have more eyeballs to sell to and more rising traffic numbers with which to attract investment. Facebook turning on the traffic fire hose is like loose monetary policy that stimulates the economy for everyone.

Of course, Facebook could tighten policy, pulling traffic (liquidity) and leaving weaker players parched. When the Fed tightens policy, shaky borrowers who depend on ample lending are hit hardest. When Facebook tightens policy, second-tier publishers that totally rely on Facebook are hit hardest.

Digital divide is wider than we think, study says

Over all, Microsoft concluded that 162.8 million people do not use the internet at broadband speeds, while the F.C.C. says broadband is not available to 24.7 million Americans. The discrepancy is particularly stark in rural areas. In Ferry County, for example, Microsoft estimates that only 2 percent of people use broadband service, versus the 100 percent the federal government says have access to the service.

The hardest problem in finance

But here’s the catch, this table assumes you get this rate of return year after year after year. The real world is not so accommodating. The table above shows that you can earn 4% a year for 34 years before running out of money, but let’s look at what happens if a nasty bear market were to arrive as soon as you retire. The chart below shows one way in which an investor can arrive at a 4% CAGR over a 30 year period.

The danger of assuming compound annual growth rates when making long term projections can be seen in the chart below. The black line shows that spending a constant $40k annually, using the returns from the previous chart, an investor would run out of money in the 19th year. Spending 4% and assuming a 2% inflation rate, a more realistic assumption, an investor would run out of money in just 15 years. Side note, if the returns above were to happen in reverse, in other words the bear market comes at the end of the period, an investor with the same spending would be left with $1.3 million.

Curated Insights 2018.12.07

The money and math behind our newsletter headlines

That means that the winning headline results in 4,620 incremental opens per newsletter. Over the course of a month, that is 115,000+ incremental opens. If we apply a conservative estimate based on some of our data from 2015 of how many of those incremental opens try the CB Insights free product (0.09%) and that only 1% of those trials buy a subscription, we’re looking at nearly $625,000 of incremental revenue.

Facebook is undervalued

The result of billions of readers providing free content for each other is a massive network effect and a business that can serve each incremental ad at a very low marginal cost. The company’s 85% gross margin leaves a lot of meat on the bone that the company can spend on hiring new engineers and developing new technology that is needed to maintain and grow the business. But even after paying the engineers, growing the headcount, spending over $9 billion on R&D, and paying the tax bill, shareholders are still left with around 40 cents of profit for each dollar of revenue. Facebook reinvests these earnings into data centers, technology, and the occasional acquisition, but even so, the cash in the till has been piling up, and now exceeds $40 billion and counting ($14 per share). Facebook has spent $10 billion on buybacks in the last year, and this will likely accelerate in the coming years.

Facebook’s business is still growing fast (33% revenue growth last quarter), and despite the company’s large size, the runway is still long. Benedict Evans, a partner at the VC firm Andreessen Horowitz, recently pointed out that roughly $1 trillion is spent each year by businesses who are trying to reach customers who are asking the question: “What should I buy?”. Facebook has roughly 5% of this market, which I think is a share that will inevitably rise over the coming years as advertising dollars continue to shift from traditional media to the much higher ROI advertising platforms like Google, Facebook, and Amazon.

A strong network leads to Facebook grabbing a much greater share of the $1 trillion (and growing) global ad/marketing industry. Revenue from ads alone could easily be twice the current size, which means that Facebook is a $100 billion business before counting any of the possible upside from payments, messaging, or any of the other potential business lines that the company could develop on the back of its large network effect.


Accelerator demand should grow ten-fold according to top 500 supercomputers

If the data center market as a whole were to follow in the footsteps of HPC, accelerators could displace Intel CPUs as the workhorse of enterprise computing.

If processors were to grow to 50% of total server component costs, with accelerators capturing 70% of processors, as is the case in the HPC market today, the market for accelerators could scale from $4 billion1 today to $24 billion. Currently, the size of the computer server market is $80 billion globally, according to IDC. If manufacturers take a 15% cut, then $68 billion accrues to component suppliers such as Intel, Micron, and Nvidia. Today we estimate that processors account for roughly 35% of server component costs, the balance allocated to memory, storage, and networking. With HPC and AI, servers are evolving toward higher compute configurations, pushing processors and accelerators to 80% of total component costs.

As shown by the latest IDC data above, the server market as a whole continues to grow, driven primarily by higher average selling prices (ASPs). With denser configurations, server ASPs could climb from today’s price of $8,000 to $10,000. Even at the current volume of 10 million units per year, that would grow the server market 25% from $80 to $100 billion, pushing the accelerator total addressable market to $35 billion.

Today, the accelerator market is dominated by Nvidia’s data center products, which we estimate will generate $3.2 billion of revenue in 2018. Nvidia estimates that its data center business has a total addressable market of $50 billion—a figure larger than Intel’s data center business, which seems difficult to reconcile. That said, as the latest data from IDC and Top 500 shows, the server market is undergoing a fundamental shift. The decay of Moore’s Law has increased total server spend as compute intensive workloads migrate from CPUs to specialized processors. If CPUs and accelerators were to swap places in the data center, as they did in HPC, the accelerator market would approach Nvidia’s estimate, implying a 10x increase over the next five to ten years.

Artificial intelligence is giving rise to fake fingerprints. Here’s why you should be worried

In the new paper, the researchers used neural networks—the foundational software for data training—to create convincing looking digital fingerprints that performed even better than the images used in the earlier study. Not only did the fake fingerprints look real, they contained hidden properties undetectable by the human eye that could confuse some fingerprint scanners.

Julian Togelius, one of the paper’s authors and an NYU associate computer science professor, said the team created the fake fingerprints, dubbed DeepMasterPrints, using a variant of neural network technology called “generative adversarial networks (GANs),” which he said “have taken the AI world by storm for the last two years.”

Daniel Kahneman: Your intuition is wrong, unless these 3 conditions are met

There are three conditions that need to be met in order to trust one’s intuition. The first is that there has to be some regularity in the world that someone can pick up and learn. “So, chess players certainly have it. Married people certainly have it,” Kahnemen explained. However, he added, people who pick stocks in the stock market do not have it. “Because, the stock market is not sufficiently regular to support developing that kind of expert intuition,” he explained. The second condition for accurate intuition is “a lot of practice,” according to Kahneman. And the third condition is immediate feedback. Kahneman said that “you have to know almost immediately whether you got it right or got it wrong.”

The 80-hour workweek

Every year on Wall Street, first-year analysts who were once courted by college recruiters with lines about how they would be given meaningful, creative work and the chance to learn from top executives are shown the harsh truth: they are Excel grunts whose work is often meaningless not just in the cosmic sense, but in the sense of being seen by nobody and utilized for no productive purpose. Some of the hundred-page pitch books analysts spend their late-night hours fact-checking in painstaking detail are simply thrown away after being given a quick skim by a client. In other cases, the client doesn’t read the deliverables at all, and the analysts’ work is literally garbage.

Most days that winter, he had worked the “banker nine-to-five”—getting to work at 9:00 a.m. and staying until 5:00 a.m. the next morning, at which point he’d trudge back to his Murray Hill apartment, sleep for three or four hours, and do it all over again. Even the money he was making wasn’t cheering him up. Ricardo had once made the mistake of calculating what his hourly wage would be, given his salary and a conservative estimate of his year-end bonus. The result—which he estimated was something like $16 an hour, after taxes—was much more than minimum wage, but not nearly enough for Ricardo to be able to justify the punishment he’d been taking.

The question of in office hours versus out of office hours is a good one in thinking about a career in the finance industry. I knew basically nothing when I came into finance so a massive amount of my learning was done on my own after hours.

Curated Insights 2018.11.30

What’s next for marketplace startups? Reinventing the $10 trillion service economy, that’s what.

The service economy lags behind: while services make up 69% of national consumer spending, the Bureau of Economic Analysis estimated that just 7% of services were primarily digital, meaning they utilized internet to conduct transactions.

In the a16z portfolio, Honor is building a managed marketplace for in-home care, and interviews and screens every care professional before they are onboarded and provides new customers with a Care Advisor to design a personalized care plan. Opendoor is a managed marketplace that creates a radically different experience for buying and selling a home. When a customer wants to sell their home, Opendoor actually buys the home, performs maintenance, markets the home, and finds the next buyer. Contrast this with the traditional experience of selling a home, where there is the hassle of repairs, listing, showings, and potentially months of uncertainty.

Managed marketplaces like Honor and Opendoor take on steps of the value chain that platforms traditionally left to customers or providers, such as vetting supply. Customers place their trust in the platform, rather than the counterparty of the transaction. To compensate for heavier operational costs, it’s common for managed marketplaces to actually dictate pricing for services and charge a higher take rate than less-managed marketplace models.

The last twenty years saw the explosion of a number of services coming online, from transportation to food delivery to home services, as well as an evolution of marketplace models from listings to full-stack, managed marketplaces. The next twenty years will be about the harder opportunities that software hasn’t yet infiltrated–those filled with technological, operational, and regulatory hurdles–where there is room to have massive impact on the quality and convenience of consumers’ everyday lives.

The services sector represents two-thirds of US consumer spending and employs 80% of the workforce. The companies that reinvent various service categories can improve both consumers’ and professionals’ lives–by creating more jobs and income, providing more flexible work arrangements, and improving consumer access and lowering cost.

Country stock markets as a percent of world

Keyence’s miraculous margins

The outsourcing reduces capital expenditure costs, and the associated depreciation, as there’s no machinery to purchase. It is also said to help Keyence to retain its valuable intellectual property. Suppliers, according to Morten Paulsen, Head of Research at CLSA Japan, have no visibility on how the respective pieces of the product puzzle fit together.

But Keyence are not the only business to run a “fabless” model. Apple, perhaps the most successful consumer brand of all time, outsources the creation of its iPhone to Taiwanese Foxconn. It reported operating margins of 26 per cent last quarter. Similarly, semiconductor designers such as Nvidia, Broadcom and Qualcomm also outsource to businesses like Taiwan Semiconductor. Their margins tend to range from 20 per cent to 40 per cent.

Keyence is also excellent at leveraging its suppliers, which it does “in a cleverer way than any other company I’ve seen”, he told us. Indeed, Keyence often has multiple suppliers manufacturing the same part, which stops one raising prices in fear of losing orders to competitors. Further to this, Keyence develops some of its manufacturing processes in house, then trains the suppliers, which means it can switch suppliers with greater ease than most if it begins to get strong armed, Paulsen argues.

What about its products? To its credit, Keyence has positioned itself right at the forefront of several key trends in an era of increasing factory automation, such as sensors which detect infinitesimal assembly-line mistakes. Customers, such as automakers — which make up roughly 25 per cent of its sales, according to Paulsen — are happy to pay top dollar for products that pay for themselves in 2 years, giving Keyence some degree of pricing power.

The reason for achieving high profitability is to maximise customer’s evaluation of products with high value added — that is, for customers, “I do not think it is expensive” and “I think it is cheap if it [our problem] can be solved” . . . As we explore the potential needs of our customers and develop them [the products] in advance, about 70 per cent of the new products of Keyence are the industry’s first and world’s first product as a result. Even in terms of management, we concentrate resources on product planning and design . . . we are trained to not only sell goods but also propose ideas that can solve customer’s problems.

Amazon, with little fanfare, emerges as an advertising giant

“The online retailer has ascended to the No. 3 spot in the U.S. digital ad market behind the dominant players, Alphabet Inc.’s Google and Facebook Inc. Though Amazon has just 4% of the market now, the company is expanding its avenues for marketers and hiring aggressively for its ad unit.

Amazon’s ad revenue is on pace to double this year, to $5.83 billion, according to eMarketer. Its ad sales are expected to jump $28.4 billion over the next five years, according to Cowen & Co.—more than the combined increases in ad revenue for all television networks globally, according to figures from media-buyer GroupM.”

Amazon’s ad business now contributes to gross profit and is expected to generate more income than its cloud business—which currently provides the bulk of its profits—as soon as 2021, according to Piper Jaffray analysts.

Amazon is expected to collect 15 cents of each new dollar spent on U.S. digital ads in 2020, up from 5 cents last year, according to an analysis of data from research firm eMarketer.

Why doctors hate their computers

This, I discovered, was the real reason the upgrade cost $1.6 billion. The software costs were under a hundred million dollars. The bulk of the expenses came from lost patient revenues and all the tech-support personnel and other people needed during the implementation phase.

Optimize your programming decisions for the 95%, not the 5%

Without having a deep understanding of what you’re developing and have put in the time to come up with good abstractions based on real experience, you’re just shooting in the dark hoping your generic user system works for all cases when you haven’t even programmed it yet for 1 use case. How is that even possible to do?

When you blindly follow what Google and other massive companies are doing, you’re optimizing for the 5% in a slightly different way. Instead of just getting your app up and running and seeing how it goes, you try to make decisions so that your application can be developed by 100 different teams sprawling across 5,000 developers. Meanwhile it’s just you developing the app by yourself in nearly all cases for new projects.

As soon as you start trying to make it work for a real application, or more specifically, your application, it all falls apart until you spend the time and really learn what it takes to scale an application (which is more than just picking tools). The companies that created these tools have put in the time over the years and have that knowledge, but that knowledge is specific to their application.

Premature optimization is the root of all evil (or at least most of it) in programming.

Optimizing for the 5% is a type of premature optimization. Maybe not so much for your development environment choices, but certainly for the other cases. Base your decisions on optimizing for the 95%, keep it simple and see how it goes. In other words, optimize when you really need to not because of “what if”.

Curated Insights 2018.09.28

The problem with compounders

What is most important is you find a business with the correct business model that can grow sales. The sales engine of the company is the most important aspect, and also the one most overlooked by investors and analysts. Sure, cost structure matters, and business model matters as does “capital allocation”, which is what they do with the tiny bit of leftover money, but what matters most is sales.
Herein lies a problem. How do you determine that a small company with the correct business model will grow sales at a high rate? The only way to do that is to visit the company and talk to management. But talking to management isn’t enough. You need to sit down and discuss their sales strategy, understand who their employees are and evaluate the ability to execute on their plan.

This is clearly a dark spot for most analysts and investors. How do you determine if the sales manager is selling you, or knows what they’re talking about? Especially if there isn’t much in the way of results to look at? I believe it’s possible, but instead of having a solid background in financial analysis you need to have sales experience and understand the sales process. Instead of reading the newest book on investing strategies your bookshelf should be full of books on pricing, call strategies, how to approach demos, and prospecting. It’s also worth remembering that enterprise sales is a different beast from consumer sales, or small business sales.

When you start to put all the pieces of this puzzle together it starts to become more apparent why everyone didn’t invest in Starbucks, or Microsoft, or Oracle when they were tiny companies. To truly catch a compounder when they’re in infancy you need a set of skills that few investors possess. It’s not impossible to build out that skill set. Understanding this paradox also helps to expose the myth that buying high growth companies is a surefire way to success. Buying high growth companies IS a surefire way to success if you can buy them when they’re small enough and their market is large enough.


Different kinds of smart

Everyone knows the famous marshmallow test, where kids who could delay eating one marshmallow in exchange for two later on ended up better off in life. But the most important part of the test is often overlooked. The kids exercising patience often didn’t do it through sheer will. Most kids will take the first marshmallow if If they sit there and stare at it. The patient ones delayed gratification by distracting themselves. They hid under a desk. Or sang a song. Or played with their shoes. Walter Mischel, the psychologist behind the famous test, later wrote:

The single most important correlate of delay time with youngsters was attention deployment, where the children focused their attention during the delay period: Those who attended to the rewards, thus activating the hot system more, tended to delay for a shorter time than those who focused their attention elsewhere, thus activating the cool system by distracting themselves from the hot spots.

Delayed gratification isn’t about surrounding yourself with temptations and hoping to say no to them. No one is good at that. The smart way to handle long-term thinking is enjoying what you’re doing day to day enough that the terminal rewards don’t constantly cross your mind.


Investors want managers’ stories — Not track records — Data show

Seventy-seven percent of asset managers thought their messages were differentiated from peers, but only 21 percent of consultants believed that managers’ messages varied, according to Chestnut’s research. In addition, 75 percent of consultants who participated in the study, said their number one search criteria was investment process and portfolio construction. Manager narratives in the eVestment database, for example, get 3,000 views each month. Chestnut had 122 institutional investors and consultants participate in the study.

Amazon’s clever machines are moving from the warehouse to headquarters

Going forward, Amazon will need fewer people to manage its retail operations, a decided advantage over rivals like Walmart Inc. and Target Corp., which are both spending heavily just to catch up. “This is why Amazon is the 800-pound gorilla,” says Joel Sutherland, a supply-chain management professor at the University of San Diego. “Nobody else has the resources and expertise to pull all of these emerging technologies together to remove humans from the process as much as possible while making things more reliable and accurate.”

Faith in the technology grew as it improved. Workers were happy to see tedious tasks like managing inventory spreadsheets delegated to machines that did the work more quickly and accurately. “The numbers don’t lie,” Kwon says. “It’s a better model.”

A key turning point came in 2015 when the value of goods sold through the marketplace exceeded those sold by the retail team, the people say. The retail team, which had far more employees, watched its importance fade and money funneled into projects like Amazon Web Services and Alexa. It didn’t help that the marketplace generated twice the operating profit margin of the retail business—10 percent versus 5 percent, according to a person familiar with the company’s finances. In many international markets, the retail team has never turned a profit, the person says.

In annual sales meetings, a team of 15 people overseeing a retail category would see their growth outperformed by one person from the marketplace team, the people say. The lines between the teams began blurring. Amazon retail vendors had once enjoyed such advantages as video and banner advertising and access to daily deals that get millions of hits a day; now marketplace merchants got the same perks. Many brands became more interested in selling on the marketplace, where they—not the Amazon retail team—controlled prices, images and product descriptions.

“Computers know what to buy and when to buy, when to offer a deal and when not to,” says Neil Ackerman, a former Amazon executive who manages the supply chain at Johnson & Johnson. “These algorithms that take in thousands of inputs and are always running smarter than any human.”


Instagram’s CEO

This dynamic, by the way, was very much apparent when Snap IPO’d a year-and-a-half ago; indeed, Snap CEO Evan Spiegel, often cast as the anti-Systrom — the CEO that said “No” to Facebook — arguably had the same flaw. Systrom offloaded the building of a business to Zuckerberg; Spiegel didn’t bother until it was much too late.

Controlling one’s own destiny, though, takes more than product or popularity. It takes money, which is to say it takes building a company, working business model and all. That is why I mark April 9, 2012, as the day yesterday became inevitable. Letting Facebook build the business may have made Systrom and Krieger rich and freed them to focus on product, but it made Zuckerberg the true CEO, and always, inevitably, CEOs call the shots.


Now Facebook needs to worry about the Instagram founders’ next move

Tech companies with non-compete agreements for employees of up to one year rarely enforce them in full—especially in California, where courts have routinely thrown them out or severely restricted the scope of such agreements, Ted Moskovitz, a former SEC lawyer-turned-tech-entrepreneur, tells Barron’s. “California courts are extremely hostile to non-competes, and typically only enforce them where there is some other concern, like theft of trade secrets involved,” Moskovitz says. “California’s economy is highly reliant on innovation and the bringing to market of new ideas.”

The greater issue, he says, is whether Systrom and Krieger are taking proprietary and/or patented intellectual property with them.


Exclusive manager interview on Facebook

Imagine 100 years from today. My great great grandkids will have the ability to see who I was, what I was like, who I spent time with (if I give permission to Facebook to share my account prior to my death…?). This is a wonderful service for future generations. How could a company replicate such a wonderful service? All the photos, memories, comments, stories, and effort that we’ve put into the platform for the last 14 years has created a network and a legacy that I don’t believe will be easy to move or replace. We believe the moat around Facebook is getting wider everyday.

That being said, short-term data shows declines in user numbers for the youngest cohorts. This should be expected. Facebook becomes more interesting for people as they get older. As you age a mature you are posting pictures of your wedding day, your first child, your parents holding grandchildren, etc. You spend time staying in touch and looking at the lives of people that use to be very important in your life, like your brothers or friends from college, old work colleuges, etc. When you’re in high school you live with your family, you don’t have many friends that are scattered across the world, and you’re too cool to stay in touch with Mom and Dad. SnapChat makes way more sense for this young cohort. You can send inappropriate and temporary images as you discover who you are. I wouldn’t expect Facebook to ever really dominate the youngest cohorts, but I do expect that as this cohort matures many of them will spend less time and SnapChat and more time on Facebook. Priorities change overtime and Facebook definitely plays a critical and positive role in the world today.

Sirius XM’s deal to buy Pandora is a win for legacy media

It turns out that costly physical infrastructure and traditional linear programming don’t always doom media companies in their battle against digital upstarts. That’s a particularly relevant point today as Comcast bulks up to continue its battle against Netflix.

Sirius has a sticky business model, in which car buyers predictably turn on the Sirius XM radios that come pre-installed in new cars. We’re at the point where a growing number of used cars are being re-purchased with those same Sirius radios still installed, making used-car buyers a growing market for Sirius. But a satellite radio subscription still can’t match the ease of use or cost of Pandora’s smartphone app, which ranges from free to $10 a month for unlimited music.

In an investor presentation on Monday, Sirius noted that Pandora expands the company’s presence “beyond the vehicle,” while diversifying Sirius’ revenue stream by adding the country’s “largest ad-supported digital audio offering.” Sirius sees opportunity for cross-promotion between its 36 million paying subscribers and Pandora’s 70 million active listeners. The bulk of Pandora’s users are non-paying customers, but the company does have about six million paying subscribers. Sirius can now try to sell its subscription package into Pandora’s large user base.


Blackstone executives have eyes on new prizes

Blackstone has grown five-fold since its initial public offering in 2007, reaching nearly $440 billion in assets, largely on the back of private equity, real estate, hedge funds, and credit. Over the last 12 months, Blackstone has brought in a record $120 billion in investor capital.

Speaking at Blackstone’s Investor Day on September 21, president and COO Jon Gray stressed that Blackstone’s business requires very little capital. Of the $439 billion it manages, only $2 billion represents balance-sheet investments. Instead, it invests the assets of its clients, largely pension funds, endowments, and other institutions. Some of the firm’s future and early-stage initiatives, such as private wealth, involve tapping more mainstream investors.

Insurers are facing increasing regulatory capital requirements and continue to be squeezed by low interest rates. “They have no choice but to move into alternatives and private credit,” said James. Insurance companies, which hold a majority of their assets in fixed income are a natural fit with Blackstone, which is one of the largest originators of credit assets. Blackstone will both manage the assets for insurers like it does for any institution, and buy mature books of business where it takes on the entire balance sheet and manages both liabilities and assets. “This is a larger and more profitable business than simply having accounts to manage. There are hundreds of billions of insurance assets being sold as we speak,” he said.

Ronaldo: Why Juventus gambled €100m on a future payday

There are early signs the bet is paying off. While in secret talks to sign Ronaldo, Juventus increased average season ticket prices by 30 per cent. All 29,300 have been sold. On match day the Juventus stadium superstore is doing a brisk trade in Ronaldo replica shirts, costing up to €154.95 — among the highest prices in Europe. For his home debut, fans travelled from all over the world while television networks spent days trailing his arrival in Turin.

To sign the striker Juventus agreed to pay Real Madrid a €100m fee over two years, a further €5m in payments that will ultimately be paid to clubs that trained him as a young player, and about €12m in fees to his agent, Jorge Mendes. Ronaldo’s four-year contract provides a salary worth more than €50m a year after tax, according to reports. The remuneration package will also allow Juventus to use his “image rights”, so that the player — who earns an estimated $47m a year in personal endorsements — can also be used in Juventus promotional campaigns. Financial services firm KPMG estimates that, including the transfer fee, amortised over the duration of his contract, Juventus will pay around €340m, or €85m a year for Ronaldo’s services.


This 24-Year-Old built a $5 billion hotel startup in five years

Oyo employs hundreds of staffers in the field who evaluate properties on 200 factors, from the quality of mattresses and linens to water temperature. To get a listing, along with a bright red Oyo sign to hang street-side like a seal of good-housekeeping approval, most hoteliers must agree to a makeover that typically takes about a month. Oyo then gets 25 percent of every booking. Rooms usually run between $25 and $85.

Agarwal wouldn’t give sales numbers, but he said the number of transactions has tripled in the last year, with 90 percent coming from repeat travelers — and no money spent on advertising. There are now 10,000 hotels in 160 Indian cities, with more than 125,000 rooms, listed on the site, he said. That’s about 5 percent of India’s total room inventory, according to RedSeer estimates.

China claims more patents than any country—most are worthless

As of last year, more than 91 percent of design patents granted in 2013 had been discarded because people stopped paying to maintain them, according to JZMC Patent and Trademark data compiled for a Bloomberg query. Things aren’t much better for utility models with 61 percent lapsing during the same five-year period, while invention patents had a disposal rate of 37 percent. In comparison, maintenance fees were paid on 85.6 percent of U.S. patents issued in 2013, according to the United States Patent and Trademark Office.


The future of fish farming may be indoors

Bio-security routines that require sanitizing hands and dipping shoes in disinfectant bins minimize the risk of disease and the need for antibiotics that other forms of aquaculture heavily rely on, says Peterson, who has advised Nordic Aquafarms regarding best practices. However, just one employee who fails to complete the process correctly or neglects other basic protocol could contaminate the operation—with pathogens potentially looping through the recirculating system and killing an entire tank of fish. Large-scale companies could guard against this with monitoring equipment that lets them respond quickly to any issues, Peterson says, adding that strict government permits require routine monitoring that would also detect unusual levels of discharge in wastewater.

The real environmental toll of big indoor systems will depend on the capacity of local infrastructure, including the water supply, Timmons says. Recirculating systems can recycle more than 90 percent of tank water but some of it does get lost to evaporation or absorbed in solid waste each day. He calculates that a farm the size of the Belfast facility would (after the initial tank fill) consume about 1.65 billion liters of freshwater per year—roughly equivalent to the water use of about 12,000 people. But he notes even in a town of fewer than 7,000 people, like Belfast, this is within the capacity of the local aquifer—and is dwarfed by the volume of water the farm would recycle each year. In more drought-prone regions indoor aquaculture facilities could release wastewater for irrigating agricultural fields, reducing the water burden, Timmons adds.


Scientists finally crack wheat’s absurdly complex genome

This is already happening. Using the completed genome, the team identified a long-elusive gene (with the super-catchy name of TraesCS3B01G608800) that affects the inner structure of wheat stems. If plants have more copies of the gene, their stems are solid instead of hollow, which makes them resistant to drought and insect pests. By using a diagnostic test that counts the gene, breeders can now efficiently select for solid stems.


Nearly half of cellphone calls will be scams by 2019, report says

Nearly half of all cellphone calls next year will come from scammers, according to First Orion, a company that provides phone carriers and their customers caller ID and call blocking technology.

The Arkansas-based firm projects an explosion of incoming spam calls, marking a leap from 3.7 percent of total calls in 2017 to more than 29 percent this year, to a projected 45 percent by early 2019.

Everything you know about obesity is wrong

According to the Centers for Disease Control and Prevention, nearly 80 percent of adults and about one-third of children now meet the clinical definition of overweight or obese. More Americans live with “extreme obesity“ than with breast cancer, Parkinson’s, Alzheimer’s and HIV put together.


35 years ago today, one man saved us from world-ending nuclear war

Petrov did not report the incoming strike. He and others on his staff concluded that what they were seeing was a false alarm. And it was; the system mistook the sun’s reflection off clouds for a missile. Petrov prevented a nuclear war between the Soviets, who had 35,804 nuclear warheads in 1983, and the US, which had 23,305.

A 1979 report by Congress’s Office of Technology Assessment estimated that a full-scale Soviet assault on the US would kill 35 to 77 percent of the US population — or between 82 million and 180 million people in 1983. The inevitable US counterstrike would kill 20 to 40 percent of the Soviet population, or between 54 million and 108 million people.


Market research tricks

If you ask a question as close as possible to the claim you want to make, and ensure you survey a representative national sample of category users, any national chain in any category will beat competitors that are superior but only regionally available.

As a result of this research and ad campaign, one of Jimmy Dean’s regional competitors actually did its own research, but only in its regional area. The company found that it could beat Jimmy Dean in its region, and made its own ads that said in effect, “Did you really want to eat a breakfast sausage that people in both New York and San Francisco ate? No, you want (our) brand that tastes better to people like you and me here in (their local region).”

And because Taco Bell is pretty much ubiquitous, and enough people everywhere will vote for it because they haven’t found good, authentic Mexican food in their areas, it wins this title. There is no way that local restaurants, or even good regional chains, could compete with the sheer numbers of a national chain.

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?