Curated Insights 2018.10.12

“[The whole tech bubble] is very interesting, because the stock is not the company and the company is not the stock. So as I watched the stock fall from $113 to $6 I was also watching all of our internal business metrics: number of customers, profit per unit, defects, everything you can imagine. Every single thing about the business was getting better, and fast. So as the stock price was going the wrong way, everything inside the company was going the right way. We didn’t need to go back to the capital markets because we didn’t need more money. The only reason a financial bust makes it really hard is to raise money. So we just needed to progress.”

“Everything I have ever done has started small. Amazon started with a couple of people. Blue Origin started with five people and the budget was very small. Now the budget approaches a billion dollars. Amazon was literally ten people, today it’s half a million. For me it’s like yesterday I was driving packages to the post office myself and hoping one day we could afford a forklift. For me, I’ve seen small things get big and it’s part of this ‘day one’ mentality. I like treating things as if they’re small; Amazon is a large company but I want it to have the heart and spirit of a small one.”

“I believe in the power of wandering. All of my best decisions in business and in life have been made with heart, intuition and guts. Not analysis. When you can make a decision with analysis you should do so. But it turns out in life your most important decisions are always made with instinct, intuition, taste and heart.”

“AWS completely reinvented the way companies buy computation. Then a business miracle happened. This never happens. This is the greatest piece of business luck in the history of business as far as I know. We faced no like-minded competition for seven years. It’s unbelievable. When you pioneer if you’re lucky you get a two year head start. Nobody gets a seven year head start. We had this incredible runway.”

“We are so inventive that whatever regulations are promulgated or however it works, that will not stop us from serving customers. Under all regulatory frameworks I can imagine, customers are still going to want low prices, they are still going to want fast delivery, they are still going to want big selection. It is really important that politicians and others need to understand the value big companies bring and not demonise or vilify big companies. The reason is simple. There are certain things only big companies can do. Nobody in their garage is going to build an all carbon-fiber fuel efficient Boeing 787. It’s not going to happen. You need Boeing to do that. This world would be really bad without Boeing, Apple, Samsung and so on.”

How big can Amazon get?

What business is Amazon most similar to? Definitely not Wal-Mart. Amazon’s model is much, much closer to Costco’s model. How does Costco’s model differ from Wal-Mart’s model?

Costco does not try to be a leading general retailer in specific towns, counties, states, the nation as a whole, etc. What Costco does is focus on getting a very big share of each customer’s wallet. Costco also focuses on achieving low costs for the items it does sell by concentrating its buying power on specific products and therefore being one of the biggest volume purchasers of say “Original” flavor Eggo waffles. It sells these waffles in bulk, offers them in one flavor (Wal-Mart might offer five different flavors of that same product) and thereby gets its customer the lowest price.

There’s two functions that Costco performs where it might be creating value, gaining a competitive advantage, etc. One is supply side. Costco may get lower costs for the limited selection it offers. In some things it does. In others, it doesn’t. The toughest category for Costco to compete in is in fresh food. I shop at Costco and at other supermarkets in the area. The very large format supermarkets built by companies like HEB (here in Texas) can certainly match or beat Costco, Wal-Mart, and Amazon (online and via Whole Foods stores) when it comes to quality, selection, and price for certain fresh items. But, what can Costco do that HEB can’t? It can have greater product breadth (offering lots of non-food items) and it can make far, far, far more profit per customer.

Now, an interesting question to ask is what SHOULD determine the market value per customer. Not what does. But, what should? In other words, if we had to do a really, really long-term discounted cash flow calculation – what variables would matter most? If two companies both have 10 million customers which company should be valued higher and why? Two variables matter. One: Annual profit per customer. Two: Retention rate. Basically, we’re talking about a DCF here. If Company A and Company B both have 10 million customers and both make $150 per customer the company that should have a higher earnings multiple (P/E or P/FCF) should be the one with the higher retention rate.

What Spotify can learn from Tencent Music

Tencent Music is no small player: As the music arm of Chinese digital media giant Tencent, its four apps have several hundred million monthly active users, $1.3 billion in revenue for the first half of 2018, and roughly 75 percent market share in China’s rapidly growing music streaming market. Unlike Spotify and Apple Music, however, almost none of its users pay for the service, and those who do are mostly not paying in the form of a streaming subscription.

Its SEC filing shows that 70 percent of revenue is from the 4.2 percent of its overall users who pay to give virtual gifts to other users (and music stars) who sing karaoke or live stream a concert and/or who paid for access to premium tools for karaoke; the other 30 percent is the combination of streaming subscriptions, music downloads, and ad revenue.

Tencent Music has an advantage in creating social music experiences because it is part of the same company that owns the country’s leading social apps and is integrated into them. It has been able to build off the social graph of WeChat and QQ rather than building a siloed social network for music. Even Spotify’s main corporate rivals, Apple Music and Amazon Music, aren’t attached to leading social platforms.


Traffic acquisition costs

In other words the two companies have an agreement that Apple is paid in proportion to the actual query volume generated. This would extend the relationship from one of granting access for a number of users or devices to revenue sharing based on usage or consumption. Effectively Apple would have “equity” in Google search sharing in the growth as well as decline in search volume.

The idea that Apple receives $1B/month of pure profit from Google may come as a shock. It would amount to 20% of Apple’s net income and be an even bigger transfer of value out of Google. The shock comes from considering the previously antagonistic relationship between the companies.

The remarkable story here is how Apple has come to be such a good partner. Both Microsoft and Google now distribute a significant portion of their products through Apple. Apple is also a partner for enterprises such as Salesforce, IBM, and Cisco. In many ways Apple is the quintessential platform company: providing a collaborative environment for competitors as much as for agnostic third parties.

Shares of pet insurer Trupanion are overvalued

Much of the Trupanion excitement is based on the low 1% penetration rate and the fact that it’s the only pet-insurance pure play. Bradley Safalow, who runs PAA Research, an independent investment research firm, disputes the lofty expectations. Bulls extrapolate from industry data that say about two million pets out of 184 million in North America are insured now. Safalow says that ignores a key factor—the income levels of pet owners. Because Trupanion’s policies cost about $600 to $1,500 annually and don’t cover wellness visits, he estimates that, in the case of dogs, which represent 85% of the pet market, a more realistic target customer would be owners who earn $85,000 or more a year. Based on that benchmark, Safalow estimates insurance penetration—of those most likely to buy it—at about 6% already for dogs.

The requests for rate increases would indicate that premiums aren’t keeping up with claims; that the policy risks are worse than the company expected; and that the profitability of its book of business is relatively weak. APIC’s ratio of losses and loss-adjustment expense to premiums earned have risen steadily over the past four years to 75.6% in the first quarter of this year from 68.9% for all of 2014, according to state filings. The loss ratio is total losses incurred in claims plus costs to administer the claims (loss adjustment expense) divided by premiums earned.

Bob Iger’s bets are paying off big time for Disney

Iger thinks he knows how to coax consumers who already pay for one streaming service to either add another or switch to Disney’s. “We’re going to do something different,” he says. “We’re going to give audiences choice.” There are thousands of barely watched movies on Netflix, and Iger figures that people don’t like to pay for what they don’t use. So families can buy only a Disney stream, which will offer Pixar, Marvel, Lucas, Disney-branded programming. Sports lovers can opt just for an ESPN stream. Hulu, of which Disney will own a 60% stake after it buys Fox (and perhaps more if it can persuade Comcast to sell its share), will beef up ABC’s content with Fox Searchlight and FX and other Fox assets. “To fight [Amazon and Netflix], you’ve got to put a lot of product on the table,” says Murdoch. “You take what Disney’s got in sports, in family, in general entertainment—they can put together a pretty great offer.”

Having a leader who is willing to insulate key creative people from the vicissitudes of business has helped Disney successfully incorporate its prominent acquisitions. They have not been Disneyfied. Marvel movies are not all of a sudden family friendly (at least not by Disney standards). Pixar movies have not been required to add princesses. Most of the people who ran the companies before Disney bought them still run them (with the exception of John Lasseter, who was ousted in June in the wake of #MeToo). “I’ve been watching him with his people and with Fox people; he’s clearly got great leadership qualities,” says Murdoch.”He listens very carefully and he decides something and it’s done. People respect that.”


Can anyone bury BlackRock?

Today the Aladdin platform supports more than $18 trillion, making it one of the largest portfolio operating systems in the industry. BlackRock says Aladdin technology has been adopted in some form by 210 institutional clients globally, including asset owners such as CalSTRS and even direct competitors like Vanguard.

“Not only does it provide risk transparency, but it also provides an ability to model trades, to capture trades, to structure portfolios, to manage portfolio compliance — all of the operating components of the workflow,” Goldstein says. “It’s a comprehensive, singular enterprise platform versus a model where you’re piecing together a lot of things and trying to figure out how to interface them.”

In a market that’s traditionally been very fragmented, BlackRock’s ability to offer an integrated, multipurpose platform has proven a strong selling point for prospective clients — even when it’s up against competitors that perform specific functions better.

How to break up a credit ratings oligopoly

This is not to say Kroll’s firm, Kroll Bond Rating Agency, hasn’t been successful. It grew gross fees by 49 percent annualized between 2012 and the end of 2017 on the back of growing institutional demand for alternative investments. Since 2011 it has rated 11,920 transactions, representing $785 billion and 1,500 issuers. Still, KBRA and other competitors, including Lisbon-based ARC Ratings and Morningstar Credit Ratings, that have entered the sector in the last decade have barely made a dent in the market share of the big three.

The upstarts are facing more than just deeply entrenched competition, although that is striking: S&P, Moody’s, and Fitch control more than 90 percent of the market combined. A host of other complex factors have combined to make it nearly impossible to dislodge the big three — and to address the central conflict of interest baked into the ratings agency business model.


Elon Musk, Google and the battle for the future of transportation

We think a similar analogy is likely with AV/EV — the most economically well-off people will still care about comfort, features, and identity that the AV/EV they ride and arrive in imparts on them. If Waymo can deliver a premium experience at a better price and higher utility than their current solution (i.e. driving themselves in their own cars or Ubers/taxis) with cost economics that yield a strong profit margin/ROIC at scale (1/2-1/3 the pricing of Uber at 1/10 the cost), it will have built an offering that will be set to be the leading AV service and create tremendous value for shareholders despite the early capital intensity. Estimates of the value of this Transportation as a Service (TaaS) or Mobility as a Service (MaaS) go from hundreds of billions on up based on Morgan Stanley’s estimate of 11 billion miles (3B in the US) driven globally and forecasted to double over the next decade.

Eventually, if Waymo is successful at taking the strong lead via network effects in AV and converting enough consumers to use its premium service (achieving a cultural and regulatory tipping point), it could decide to open up its service’s usage across other auto “hardware” partners as they demonstrate their ability to deliver a certain level of quality experience and scale globally, enabling a broader application of its service to lower tiers of the market with lower capital intensity (akin to Apple’s 2nd hand iPhone market, which broadens its user base for services offerings).


Network effect: How Shopify is the platform powering the DTC brand revolution

“The 21st-century brand is the direct-to-consumer brand,” said Jeff Weiser, chief marketing officer at Shopify. “A couple of things have enabled the rise of the DTC, which is the ability to outsource the supply chain.” For Weiser, who described himself as “loving” anything to do with DTC, what Shopify does is power all of that ability — from selling to payments to marketing. “We run the gamut of a retail operating system.” The company has admittedly benefited from a DTC boom: Starting with small businesses run from people’s kitchens, then going upmarket to giant Fortune 500 companies, Weiser said that DTC’s “graduation” into giant juggernauts themselves has made a huge difference. Shopify powers hundreds of those companies, from Allbirds to mattress brand Leesa to Chubbies.

Just as Google and Facebook are core to anyone marketing online, Shopify is becoming the same to those who sell directly online. Like any platform, Shopify is building an ecosystem of developers, startups and ad agencies. The company has 2,500 apps through its own app store. The company can, like the Apple App Store, add apps into its ecosystem that merchants can then purchase.


Why the Elastic IPO is so important

Elastic’s open source products are downloaded voluminously, with over 350M downloads of its open source software to date. As a result, sales engages with customers who are already users and highly familiar with the products. This leads to shorter sales cycles and higher sales conversions. Additionally, awareness and engaged prospects are generated by popular open source projects, such as Elasticsearch and others from Elastic, obviating the need for top-of-funnel and mid-funnel marketing spend. Elastic still spent a healthy 49% of revenue on Sales & Marketing in FY ’18 (year ending Jan ’18) but this was down from 60% the prior year, and the implied efficiency on Elastic’s Sales & Marketing spend is extremely high, enabling the 79% top-line growth the company has enjoyed. Finally, Elastic shows how disruptive an open source model can be to competition. There are already large incumbents in the search, analytics, IT Ops and security markets, but, while the incumbents start with sales people trying to get into accounts, Elastic is rapidly gaining share through adoption of its open source by practitioners.

Elastic controls the code to it open source projects. The committers are all employed by the company. Contributions may come from the community but committers are the last line of defense. This is in contrast to open source projects such as Linux and Hadoop, where non profit foundations made up of many commercial actors with different agendas tend to govern updates to the software. The biggest risk to any open source project is getting forked and losing control of the roadmap, and its difficult for a company to build a sustainable high margin business supporting a community-governed open source project as a result. Elastic, and other companies who more tightly control the open source projects they’ve popularized, have full visibility to roadmaps and are therefore able to build commercial software that complements and extends the open source. This isn’t a guarantee of success. The viability of any open source company rests with the engagement of its open source community, but if Elastic continues to manage this well, their franchise should continue to grow in value for for foreseeable future.


Elastic closed 94% up in first day of trading on NYSE, raised $252M at a $2.5B valuation in its IPO

“When you hail a ride home from work with Uber, Elastic helps power the systems that locate nearby riders and drivers. When you shop online at Walgreens, Elastic helps power finding the right products to add to your cart. When you look for a partner on Tinder, Elastic helps power the algorithms that guide you to a match. When you search across Adobe’s millions of assets, Elastic helps power finding the right photo, font, or color palette to complete your project,” the company noted in its IPO prospectus.

“As Sprint operates its nationwide network of mobile subscribers, Elastic helps power the logging of billions of events per day to track and manage website performance issues and network outages. As SoftBank monitors the usage of thousands of servers across its entire IT environment, Elastic helps power the processing of terabytes of daily data in real time. When Indiana University welcomes a new student class, Elastic helps power the cybersecurity operations protecting thousands of devices and critical data across collaborating universities in the BigTen Security Operations Center. All of this is search.”

The Big Hack: How China used a tiny chip to infiltrate U.S. companies

One government official says China’s goal was long-term access to high-value corporate secrets and sensitive government networks. No consumer data is known to have been stolen.

With more than 900 customers in 100 countries by 2015, Supermicro offered inroads to a bountiful collection of sensitive targets. “Think of Supermicro as the Microsoft of the hardware world,” says a former U.S. intelligence official who’s studied Supermicro and its business model. “Attacking Supermicro motherboards is like attacking Windows. It’s like attacking the whole world.”

Since the implants were small, the amount of code they contained was small as well. But they were capable of doing two very important things: telling the device to communicate with one of several anonymous computers elsewhere on the internet that were loaded with more complex code; and preparing the device’s operating system to accept this new code. The illicit chips could do all this because they were connected to the baseboard management controller, a kind of superchip that administrators use to remotely log in to problematic servers, giving them access to the most sensitive code even on machines that have crashed or are turned off.

Can anyone catch America in plastics?

Ethane, once converted to ethylene through “cracking” is the principal input into production of polyethylene. Simply put, ethane is turned into plastic. Polyethylene is manufactured in greater quantities than any other compound. U.S. ethane production has more than doubled in the past decade, to 1.5 Million Barrels per Day (MMB/D).

The result is that ethane trade flows are shifting, and the U.S. is becoming a more important supplier of plastics. The Shale Revolution draws attention for the growth in fossil fuels — crude oil and natural gas, where the U.S. leads the world. But we’re even more dominant in NGLs, contributing one-third of global production. The impact of NGLs and consequent growth in America’s petrochemical industry receives far less attention, although it’s another huge success story.


Amazon’s wage will change how U.S. thinks about work

If $15 an hour becomes the new standard for entry-level wages in corporate America, its impact may be felt most broadly among middle-class workers. Average hourly earnings for non-managerial workers in the U.S. were $22.73 an hour in August. The historically low level of jobless claims and unemployment, combined with $15 an hour becoming an anchor in people’s minds, could make someone people earning around that $22 mark feel more secure in their jobs. Instead of worrying about losing their job and being on the unemployment rolls for a while, or only being able to find last-ditch work that pays $9 or $10 an hour, the “floor” may be seen as a $15 an hour job.

That creates a whole new set of options for middle-class households. In 2017, the real median household income in the U.S. was $61,372, which is roughly what two earners with full-time jobs making $15 an hour would make. A $15-an-hour floor might embolden some workers to quit their jobs to move to another city even without a job offer there. It might let some workers switch to part-time to focus more time on education, gaining new skills or child care.

Circle of competence

It’s not the size of your circle of competence that matters, but rather how accurate your assessment of it is. There are some investors who are capable of figuring out incredibly complex investments. Others are really good at a wide variety of investments types, allowing them to take advantage of a broad set of opportunities. Don’t try to keep up with the Joneses. Figure out what feels comfortable, and do that. If you are not quite sure whether something is within your circle of competence or not – that in and of itself is an indicator that it’s better to pass. After all, to quote Seth Klarman’s letter to his investors shortly after the Financial Crisis of 2008, “Nowhere does it say that investors should strive to make every last dollar of potential profit; consideration of risk must never take a backseat to return.”


Lessons from Howard Marks’ new nook: “Mastering the Market Cycle – Getting the Odds on Your Side”

… you can prepare; you can’t predict. The thing that caused the bubble to burst was the insubstantiality of mortgage-backed securities, especially subprime. If you read the memos, you won’t find a word about it. We didn’t predict that. We didn’t even know about it. It was occurring in an odd corner of the securities market. Most of us didn’t know about it, but it is what brought the house down and we had no idea. But we were prepared because we simply knew that we were on dangerous ground, and that required cautious preparation.


Market timing is hard

People use data to justify market timing. But it’s hindsight bias, right? If you know ahead of time when the biggest peaks and troughs were through history, you can make any strategy look good. So Antti and his co-authors made a more realistic and testable market timing strategy. And here’s the key difference — instead of having all hundred years of history, Antti’s strategy used only the information that was available at the time. So, say for example it’s 1996, early tech bubble. We know after the fact that the U.S. stock market would get even more expensive for a few years before it crashed. But in 1996 you wouldn’t actually know that. So by doing their study this way, Antti could get a more realistic test of value-based market timing.

The interesting and troubling result was when we did this market timing analysis the bottom line was very disappointing. It was not just underwhelming, it basically showed in the last 50-60 years, in our lifetimes, you didn’t make any money using this information.

The Decision Matrix: How to prioritize what matters

I invested some of that time meeting with the people making these decisions once a week. I wanted to know what types of decisions they made, how they thought about them, and how the results were going. We tracked old decisions as well, so they could see their judgment improving (or not).

Consequential decisions are a different beast. Reversible and consequential decisions are my favorite. These decisions trick you into thinking they are one big important decision. In reality, reversible and consequential decisions are the perfect decisions to run experiments and gather information. The team or individual would decide experiments we were going to run, the results that would indicate we were on the right path, and who would be responsible for execution. They’d present these findings.

Consequential and irreversible decisions are the ones that you really need to focus on. All of the time I saved from using this matrix didn’t allow me to sip drinks on the beach. Rather, I invested it in the most important decisions, the ones I couldn’t justify delegating. I also had another rule that proved helpful: unless the decision needed to be made on the spot, as some operational decisions do, I would take a 30-minute walk first.

Risk management

Once you frame risk as avoiding regret, the questions becomes, “Who cares what’s hard but I can recover from? Because that’s not what I’m worried about. I’m worried about, ‘What will I regret?’”

So risk management comes down to serially avoiding decisions that can’t easily be reversed, whose downsides will demolish you and prevent recovery.

Actual risk management is understanding that even if you do everything you can to avoid regrets, you are at best dealing with odds, and all reasonable odds are less than 100. So there is a measurable chance you’ll be disappointed, no matter how hard you’ll try or how smart you are. The biggest risk – the biggest regret – happens when you ignore that reality.

Carl Richards got this right, and it’s a humbling but accurate view of the world: “Risk is what’s left over when you think you’ve thought of everything.”


The most important survival skill for the next 50 years isn’t what you think

Even if there is a new job, and even if you get support from the government to kind of retrain yourself, you need a lot of mental flexibility to manage these transitions. Teenagers or 20-somethings, they are quite good with change. But beyond a certain age—when you get to 40, 50—change is stressful. And a weapon you will have [is] the psychological flexibility to go through this transition at age 30, and 40, and 50, and 60. The most important investment that people can make is not to learn a particular skill—”I’ll learn how to code computers,” or “I will learn Chinese,” or something like that. No, the most important investment is really in building this more flexible mind or personality.

The better you know yourself, the more protected you are from all these algorithms trying to manipulate you. If we go back to the example of the YouTube videos. If you know “I have this weakness, I tend to hate this group of people,” or “I have a bit obsession to the way my hair looks,” then you can be a little more protected from these kinds of manipulations. Like with alcoholics or smokers, the first step is to just recognize, “Yes, I have this bad habit and I need to be more careful about it.”

And this is very dangerous because instead of trying to find real solutions to the new problems we face, people are engaged in this nostalgic exercise. If it fails—and it’s bound to fail—they’ll never acknowledge it. They’ll just blame somebody: “We couldn’t realize this dream because of either external enemies or internal traitors.” And then this is a very dangerous mess.

The other danger, the opposite one, is, “Well, the future will basically take care of itself. We just need to develop better technology and it will create a kind of paradise on earth.” Which doesn’t take into account all of the dystopian and problematic ways in which technology can influence our lives.

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 2018.08.24

Tech firms account for 60% of profit margin growth in the past 20 years

The information technology sector – which contains the bulk of superstar firms – accounts for 60% of the increase in S&P 500 profit margins over the past 20 years, while the “adjacent tech” sector, comprising the health care (including biotech firms) and consumer discretionary sectors (incl. firms such as Booking Holdings and Expedia) accounts for 40% of the rise. It also means the bulk of the market – i.e., all firms ex. tech, healthcare and consumer discretionary – have seen no margin growth at all since 1998.

Dear Elon: An open letter against taking Tesla private

First, as a private company, Tesla will be unable to capitalize on its competitive advantages as rapidly and dramatically as it would as a public company, an important consideration given the network effects and natural geographic monopolies to which autonomous taxi and truck networks will submit. Second, in the private market, Tesla would lose the free publicity associated with your role as the CEO of the public company not only with the bestselling mid-sized premium sedan in the US, but also arguably in the best position to launch a completely autonomous taxi network nationwide in the next few years. Just ask Michael Dell: he wants to lead a public company once again for a reason. Third, you will deprive most of your individual investors of a security to bet on you and your strategy, ceding that opportunity to high net worth and institutional investors. Finally, if you do not take Tesla private, you will be surprised and gratified at investor reaction once they realize and understand the scope and ramifications of your long-term vision and strategies.

Thoughts on Xiaomi’s eighth anniversary and inaugural month as a public company

As of March 2018, Xiaomi already had 38 apps with more than 10 million monthly active users, and 18 apps with more than 50 million monthly active users, including the Mi App Store, Mi Browser, Mi Music, and Mi Video apps. Rather than paying search engines to acquire users, Xiaomi is essentially getting paid for acquiring users through selling its smartphones. This allows Xiaomi to have a negative CAC (customer acquisition cost) for its Internet services.

Another under-appreciated pillar of Xiaomi’s growth is its “ecosystem strategy.” Xiaomi strategically invests in many startups as well as the many Internet services providers they work with, both in China and outside of China. Companies in the Xiaomi ecosystem include SmartMi (air purifiers), Zimi (power banks), Huami (Mi bands), Chun Mi (rice cookers), and 80-plus more. Thanks to these prolific investments, you can find a wide variety of products in any Xiaomi store, from scooters to ukeleles (see below). As a result, every time consumers visit a Xiaomi store, they can find something new, and the frequency of store visits is a lot higher than typical smartphone brands, even Apple.

Ensure the price of the hardware is as low as possible so the company can grow market share and users. Sell the phones online, direct-to-consumer, bypass the middlemen, and past the enormous cost savings to consumers. Overtime, the company will monetize on Internet services.

When Yahoo! Invested in Alibaba (another GGV portfolio company) in 2005, the world had 1 billion Internet users. Now, the world has 3.5 billion Internet users. Over the last 13 years, Alibaba’s valuation increased 100 times from $5 billion to $500 billion. The fact that China was the fastest growing market for Internet users during this period, coupled with Alibaba’s amazing ability to execute, turned the company into a growth miracle. In the next 12-13 years, the world will most likely grow to 5 billion Internet users. The world’s next 1 billion Internet users that will come online in the next decade – via affordable but high-quality smartphones – are outside of the US. They are in the 74 countries that Xiaomi is already in today. Going forward, Xiaomi is very well-positioned to take advantage of the next phase of growth through selling hardware, software, and bundled Internet services, as well as by investing in partner companies in those countries.


Does Tencent Music deserve a Spotify-like valuation?

Tencent Music this year could generate revenue less than half of Spotify’s projected $6 billion. Tencent Music is profitable, which is rare in music-streaming. The firm pulled in roughly two billion yuan ($290 million) in net income last year. Spotify, in contrast, reported a net loss of about $1.4 billion last year, although nearly $1 billion of that was due to a one-time financing charge.

In terms of users, Tencent Music is way bigger than Spotify. Tencent Music operates streaming service QQ Music as well as karaoke and live-streaming music apps Kugou and Kuwo. The three services had a combined 700 million monthly users in China as of September 2017, according to Tencent Music. Tencent Music operates a fourth service, the karaoke app WeSing, which at the end of last year had more than 460 million registered users. By comparison, Spotify had 180 million monthly users and 83 million paid subscribers as of June, the company has said. But Spotify’s ratio of paid versus free users is higher than at Tencent Music, where only a fraction of its Chinese users pay for music.

The secret of Tencent Music’s profitability is virtual goods and cheap music rights. Most of its revenue comes from non-subscription services including karaoke and live-streaming services, where users can pay to send virtual gifts to performers.

Swelling clout of US corporate giants is depressing pay, analysts say

As the economic weight of a small number of highly profitable and innovative “superstar” companies has increased, workers’ slice of the pie has fallen in their industries. This may have contributed to a broader fall in labour’s share of income that has been particularly noticeable in the US since the beginning of the 2000s. At the same time, corporate profitability has surged to record highs. 

Goldman Sachs analysts say rising product and labour market concentration has imposed a drag of 0.25 percentage points on annual wage growth since the early 2000s. They also stress, however, that America’s dreary productivity growth is a bigger problem.

ARK Disrupt Issue 138: GPUs, crypto, fintech, mobility, and disease

Turing will be able to perform graphics, deep learning, and ray tracing operations simultaneously, a first for any processor. The Turing GPU can perform 10 billion operations per second, enabling ray tracing in real time. In addition, it is capable of 125 trillion deep learning operations and 16 trillion graphics operations per second. Nvidia and other chip companies rarely dedicate hardware to a specific algorithm in the absence of a large market opportunity. Nvidia posits that the $2,000 Turing ray tracing GPU will target 50 million artists and designers globally. A 10% hit rate would create a $10 billion market, nearly matching Nvidia’s annual revenue today.

Because 98% of all genetic diseases are polygenic, that is involving more than one gene, the clinical utility of whole genome sequencing (WGS) is taking on new importance. To date, roughly two million whole human genomes have been sequenced. If DNA sequencing costs continue to drop by 40% per year, the number of whole human genomes sequenced should increase at 150% rate per year. As a result, genome-wide association studies should power poly-epigenetic models of disease and result in molecular diagnostic tests which introduce more science into health care decision-making.

Why battling bugs is a booming business, and may be getting bigger

Preventing pest infestations—or mitigating them after the fact—is particularly important for restaurants, hotels, and hospitals. Not only can regulators impose heavy fines or shut down businesses that violate health ordinances, customers who encounter a bug-infested business may shame them on social media. “In the age of customer review apps such as Yelp, businesses are well-aware that a customer report or, worse, photo of a pest infestation can be shared around the internet within minutes and potentially damage their brand,” says Zhu. With reputations at stake, businesses in the food and beverage, hospitality, and health care sectors are especially inclined to hire a pest control company promptly when faced with an infestation. In fact, many commercial customers schedule routine treatments to prevent potential infestations, providing pest control companies with a recurring revenue stream.

The companies best positioned to thrive in this environment are those with access to sufficient capital to acquire or open new locations. Operating an extensive branch network confers a number of competitive advantages, including the opportunity to generate greater brand recognition through cost-effective advertising and the ability to operate with lower average costs due to economies of scale. In recent years, consolidation has been intense in North America, which is still home to about half the world’s pest control companies. In fact, four of the 100 largest pest control companies in the US were acquired in May 2018 alone, two of them by US-based Terminix, and one each by European firms Rentokil and Anticimex.

Despite modern pesticides and the efforts of tens of thousands of companies, pest control remains a Sisyphean task. “It’s easy to kill bugs, but it’s much harder to keep them from coming back,” Zhu says. For the foreseeable future, the bedbugs will continue to bite—and demand for professional pest control services should continue to grow.

Litigation finance offers investors attractive yields

Funds that invest in litigation are on the rise. In the past 18 months some 30 have launched; over $2bn has been raised. Last year Burford Capital, an industry heavyweight, put $1.3bn into cases—more than triple the amount it deployed in 2016. Lee Drucker of Lake Whillans, a firm that funds lawsuits, says he gets calls weekly from institutional investors seeking an asset uncorrelated with the rest of the market—payouts from lawsuits bear no relation to interest-rate rises or stockmarket swings.

Returns are usually a multiple of the investment or a percentage of the settlement, or some combination of the two. Funders of a winning suit can expect to double, triple or quadruple their money. Cases that are up for appeal, where the timespan is short—usually 18-24 months—and the chance of a loss slimmer, offer lower returns. New cases that are expected to take years offer higher potential payouts.

As funders compete for high-quality investments, opportunities in new markets arise. Bentham IMF, a litigation funder based in New York, has joined Kobre & Kim, a law firm, to set up a $30m fund for Israeli startups to pursue claims against multinationals—for example, over trade-secret violations. A burgeoning secondary market is likely to develop further, allowing investors to cash out before long-running suits are closed. Burford recently sold its stake in an arbitration case concerning two Argentine airlines for a return of 736%. Such mouth-watering profits should keep luring capital into the courtroom.

Network-based businesses will disrupt all sectors of the economy

Networks are even more powerful because their foundations are even stronger. Large corporations leveraged mass production, mass distribution, and economies of scale. Networks leverage mass computation, mass connectivity, and network effects. Because computation and connectivity improve at exponential rates, the owner of a network has insurmountable advantages over the owner of a traditional corporation.

Corporations believe that bits enhance atoms. Networks recognize that bits are the new capital and atoms are the new labor.

Dragon quest

China now has over 100 cities with populations topping one million, compared to the entire continent of Europe which has a paltry 34. Ever heard of Zhengzhou? Don’t worry if not, it’s a tier two city in Henan province that only just makes it into China’s top 20, yet it has a bigger population than the whole of Denmark. Expressed another way, China already has more millennials than the US has people.

China is of course the world’s second biggest economy and poised one day to reach the top, but consider this: if its per capita wealth were to catch up with that of Hong Kong’s, then its resulting GDP would not just surpass the United States’ today, but triple it. This is more simply reflected in the fact that each year approximately 35 million Chinese enter the middle and affluent classes. No wonder multinationals around the world are flinging everything they have at the country.


China reaches 800 million internet users

The U.S is estimated to have around 300 million internet users. The number of internet users in China is now more than the combined populations of Japan, Russia, Mexico and the U.S., as Bloomberg noted. The new statistic takes internet adoption in the country to 57.7 percent, with 788 million people reportedly mobile internet users. That’s a staggering 98 percent and it underlines just how crucial mobile is in the country.

Jakarta, the fastest-sinking city in the world

It sits on swampy land, the Java Sea lapping against it, and 13 rivers running through it. So it shouldn’t be a surprise that flooding is frequent in Jakarta and, according to experts, it is getting worse. But it’s not just about freak floods, this massive city is literally disappearing into the ground.

“If we look at our models, by 2050 about 95% of North Jakarta will be submerged.”

It’s already happening – North Jakarta has sunk 2.5m in 10 years and is continuing to sink by as much as 25cm a year in some parts, which is more than double the global average for coastal megacities. Jakarta is sinking by an average of 1-15cm a year and almost half the city now sits below sea level. The impact is immediately apparent in North Jakarta.

There is technology to replace groundwater deep at its source but it’s extremely expensive. Tokyo used this method, known as artificial recharge, when it faced severe land subsidence 50 years ago. The government also restricted groundwater extraction and businesses were required to use reclaimed water. Land subsidence subsequently halted. But Jakarta needs alternative water sources for that to work. Heri Andreas, from Bandung Institute of Technology, says it could take up to 10 years to clean up the rivers, dams and lakes to allow water to be piped anywhere or used as a replacement for the aquifers deep underground.

We all have it now

Think about that. It took 7 months for the biggest volcanic explosion in the last 10,000 years, one that affected the global climate and killed twice as many people as any other volcanic explosion in recorded history, to become news. If the same event were to happen today, we could have someone tweeting it within minutes and we would probably have video footage online within the hour. This is possible because of the democratization of information. We all have it now. Historically, having an informational edge was worth something. Being faster or having better access meant making more money. Not anymore.

This is where we are. Only those using advanced quantitative techniques have any chance of exploiting anomalies in the data. The rest of us will need to do something else. We went from a world of privileged access to information to a world where a single tweet can change everything. A world where anyone can break the story, anyone can get the data, and anyone can be a media company. If, as Brendan Mullooly points out, today’s edges are tomorrow’s table stakes, what does that leave the typical investor to do? The answer lies in a maxim from Jim O’Shaughnessy: you must arbitrage human nature.


Buyback derangement syndrome

Investors generally do not spend the money paid out in buybacks on champagne bubble baths or other forms of consumption. Rather, they reinvest it in other stocks and bonds. Buybacks thus facilitate a movement of capital from companies that don’t need it to those that do. That’s how markets are supposed to work.

Yet another claim is that much of the market rise over the last few years has been from buybacks. The numbers don’t bear this out. The direction is plausible, as researchers have found that share prices do tend to increase—by around 1%—when buybacks are announced. Several explanations have been offered for this positive reaction including that investors see repurchases as a signal that management thinks shares are undervalued, and that investors cheer when management returns cash to shareholders rather than, perhaps, wasting it on “empire building.” These explanations are behavioral effects at the margin.

Indexers will cause the next stock market crash?

My Bloomberg colleague Eric Balchunas points out that during the 2008 credit crunch, the money flows were into index funds and exchange-traded funds; more than $205 billion was put into these funds while active funds experienced $259 billion in outflows. In other words, the 57 percent sell-off of U.S. equity markets during the financial crisis gives us a good idea how passive indexers will behave when markets crash: they become net buyers while active funds become net sellers.

Beyond the 2008 crash, we have seen several market corrections since 2009. As my colleague, Michael Batnick observed, from May to October 2011, the Standard & Poor’s 500 Index fell about 20 percent. Again, between May 2015 and mid-February 2016 the S&P 500 fell about 14 percent. Other indexes, such as the Russell 2000 fell even more. And what happened? Passive index funds continued to gain market share at the expense of actively managed funds.

Which raises the question: Just who was “cruelly exposed” in those corrections? By all lights, it looks like it was the actively managed funds.

Curated Insights 2018.08.03

Once in a lifetime, if you’re lucky

Apple did it the old fashioned and the new fashioned way – great products, great marketing, incredible innovation, brilliant people, global supply chain, incessant improvements and updates, buybacks and dividends, R&D and M&A, domestic hiring and international outsourcing, wild creativity and diligent bean-counting. They had it all and used it all. It’s an amazing story. Many of us were able to be along for the ride.


Business lessons from Rob Hayes (First Round Capital)

It is a red flag for me if the founders have 20 slides in their deck on their product and are not getting into issues like distribution, team or other parts of the business. There have been very few products that cause people to beat a path to the door of the business on their own [like Google or Facebook]. Successful companies almost always have operators running them who know how to market, sell, manage an income statement and hire.


Why do the biggest companies keep getting bigger? It’s how they spend on tech

The result is our modern economy, and the problem with such an economy is that income inequality between firms is similar to income inequality between individuals: A select few monopolize the gains, while many fall increasingly behind.

The measure of how firms spend, which Mr. Bessen calls “IT intensity,” is relevant not just in the U.S. but across 25 other countries as well, says Sara Calligaris, an economist at the Organization for Economic Cooperation and Development. When you compare the top-performing firms in any sector to their lesser competition, there’s a gap in productivity growth that continues to widen, she says. The result is, if not quite a “winner take all” economy, then at least a “winner take most” one.

What we see now is “a slowdown in what we call the ‘diffusion machine,’” says Dr. Calligaris. One explanation for how this came to be is that things have just gotten too complicated. The technologies we rely on now are massive and inextricably linked to the engineers, workers, systems and business models built around them, says Mr. Bessen. While in the past it might have been possible to license, steal or copy someone else’s technology, these days that technology can’t be separated from the systems of which it’s a part.

This seemingly insurmountable competitive advantage that comes with big companies’ IT intensity may explain the present-day mania for mergers and acquisitions, says Mr. Bessen. It may be difficult or impossible to obtain critical technologies any other way.

Everything bad about Facebook is bad for the same reason

Facebook didn’t intend for any of this to happen. It just wanted to connect people. But there is a thread running from Perkins’ death to religious violence in Myanmar and the company’s half-assed attempts at combating fake news. Facebook really is evil. Not on purpose. In the banal kind of way.

Underlying all of Facebook’s screw-ups is a bumbling obliviousness to real humans. The company’s singular focus on “connecting people” has allowed it to conquer the world, making possible the creation of a vast network of human relationships, a source of insights and eyeballs that makes advertisers and investors drool.

But the imperative to “connect people” lacks the one ingredient essential for being a good citizen: Treating individual human beings as sacrosanct. To Facebook, the world is not made up of individuals, but of connections between them.

The solution is not for Facebook to become the morality police of the internet, deciding whether each and every individual post, video, and photo should be allowed. Yet it cannot fall back on its line of being a neutral platform, equally suited to both love and hate. Arendt said that reality is always demanding the attention of our thoughts. We are always becoming aware of new facts about the world; these need to be considered and incorporated into our worldview. But she acknowledged that constantly giving into this demand would be exhausting. The difference with Eichmann was that he never gave in, because his thinking was entirely separated from reality.

The solution, then, is for Facebook to change its mindset. Until now, even Facebook’s positive steps—like taking down posts inciting violence, or temporarily banning the conspiracy theorist Alex Jones—have come not as the result of soul-searching, but of intense public pressure and PR fallout. Facebook only does the right thing when it’s forced to. Instead, it needs to be willing to sacrifice the goal of total connectedness and growth when this goal has a human cost; to create a decision-making process that requires Facebook leaders to check their instinctive technological optimism against the realities of human life.

Thinking about Facebook

If you accept that assumption, 35% EBIT margins on $97 billion in sales would equal $34 billion in operating income. Inversely, that implies more than $60 billion in expenses (COGS + OpEx). This suggests that Facebook’s run rate expenses will more than triple from 2017 to 2022. Over that same period, these assumptions would result in cumulative revenue growth of around 140%.

Let me give you one example to show just how much money we’re talking about here (over $40 billion in annual expenses). It’s assumed that Facebook will need to hire many people for its safety and security efforts. If it adds an additional 20,000 employees and pays them $200,000 each (not a bad salary!), that would cost them $4 billion a year. For some context, Facebook announced back in October that it planned on hiring an additional 10,000 safety and security personnel by the end of 2018. I’ve tried to give them plenty of room, and this still only covers roughly 10% of the incremental costs we need to account for to push operating margins to the mid-30s.

Here’s my point: I have a tough time understanding how Facebook can possibly need to spend this much money. It seems to me that this is largely a choice, not a necessity.


Apple’s stock buybacks continue to break records

No company has bought back more shares since 2012 than Apple. It has repurchased almost $220 billion of its own stock since it announced in March 2012 that it would start to buy back shares. That is roughly equivalent to the market value of Verizon Communications. Over that period, the number of Apple’s shares outstanding has dropped by just over a quarter.

Waymo’s self-driving cars are near: Meet the teen who rides one every day

Tasha Keeney, an analyst at ARK Invest, says that Waymo could choose to offer an autonomous ride-hailing service today at around 70 cents a mile—a quarter of the cost for Uber passengers in San Francisco. Over time, she says, robotaxis should get even cheaper—down to 35 cents a mile by 2020, especially if Waymo’s technology proves sturdy enough to need few human safety monitors overseeing the autonomous vehicles remotely. “You could see software-like margins,” Keeney says.

Bill Nygren market commentary | 2Q18

A closer look reveals that Gartner stock fell when management opted to substantially increase selling and marketing expenses to pursue accelerated organic growth, which in turn decreased the company’s reported earnings. The way GAAP (generally accepted accounting principles) works, because the future benefit of a marketing expense is uncertain, the cost is immediately expensed. But at a company like Gartner, these marketing expenses could easily be seen as long-term investments in company growth. That’s because a Gartner customer tends to remain with the company for a long time—a little more than six years, on average. So we adjusted the sales and marketing expenses to reflect a six-year life, just like GAAP would treat the purchase of a machine that was expected to last six years. With that one adjustment, Gartner’s expected EPS increased by almost $3. Using our adjusted earnings, which we believe reflect a more realistic view of those intangible assets, Gartner appears to be priced as just an ordinary company.

Ferrari slumps after CEO says Marchionne target is ‘aspirational’

Ferrari is banking on Camilleri getting up to speed quickly to press ahead with Marchionne’s plan. While Marchionne was planning to retire from Fiat Chrysler in 2019, he was meant to stay on at Ferrari for another five years. His succession plan was not as advanced at the Maranello-based company as it was at FCA.


WeWork is just one facet of SoftBank’s bet on real estate

If the market opportunity is big, SoftBank will typically make investments in regionally dominant companies operating in that sector. After all, if worldwide dominance is difficult to obtain for any one company, SoftBank is so big that it can take positions in the regional leaders, creating an index of companies that collectively hold a majority of market share in an emerging industry.

Heineken inks $3.1 billion deal to grow in hot China market

The deal will help Heineken gain a tighter foothold in a crowded field by leveraging China Resources Beer’s extensive distribution network, while also sharing in the returns of China’s beer market leader. China is now the second-largest premium beer market globally, and is forecast to be the biggest contributor to premium volume growth in the next five years.

Under the deal, Heineken’s operations in the country will be combined with those of China Resources Beer, and the Dutch brewer will license its brand to the Chinese partner on a long-term basis, according to company statements Friday. China Resources Beer’s parent company will acquire Heineken shares worth about 464 million euros ($538 million). Heineken will also make its global distribution channels available to China Resources’ brands including Snow, according to the statement.

Branded Worlds: how technology recentralized entertainment

There are two answers to the first question: cost and time. Maybe it’s a lot easier to shoot and edit movies/TV than it used to be, but sets, locations, actors, scripts — those are all expensive and difficult. Better amateur work is still far from professional. And while it’s true we’re seeing interesting new visual modes of storytelling, e.g. on Twitch and YouTube, it’s very rarely narrative fiction, and it’s still distributed and monetized via Twitch and YouTube, gatekeepers who implicitly (and sometimes explicitly) shape what’s popular.

More importantly, though, democratizing the means of production does not increase demand. A 10x increase in the number of TV shows, however accessible they may be, does not 10x the time any person spends watching television. For a time the “long tail” theory, that you could make a lot of money from niche audiences as long as your total accessible market grew large enough, was in vogue. This was essentially a mathematical claim, that audience demand was “fat-tailed” rather than “thin-tailed.”

China is building a very 21st century empire—one where trade and debt lead the way, not armadas and boots on the ground. If President Xi Jinping’s ambitions become a reality, Beijing will cement its position at the center of a new world economic order spanning more than half the globe. Already, China has extended its influence far beyond that of the Tang Dynasty’s golden age more than a millennium ago.
It used to be the case that active portfolio management was the default investment style. Over time, and with the help of academic finance, we have come to realize that there are other factors at work. The most obvious of which is the market factor or beta. It is this insight that underlies the rise in index investing. A trend which by all accounts is still in place.

Curated Insights 2018.07.27

 

The oral history of travel’s greatest acquisition Booking.com

We ranked Priceline’s acquisition of Bookings B.V. alone — even when excluding the Active Hotels transaction — as the fifth greatest deal in Internet history, surpassing Google-DoubleClick and Amazon-Zappos in terms of value creation. Priceline’s Active-Bookings acquisitions transformed a travel brand that was running out of capital resources and international expansion options for its Name Your Own Price business. It opened up global opportunities in hotel bookings where Booking.com disclosed the room rates in advance instead of cloaking them in a relatively complicated bidding process.

Geert-Jan: I had very little knowledge about the hotel industry. I was a night porter in a hotel as a student. It gave me some inspiration and at least I knew how the reservation process went because we had people who came in at night who hadn’t booked so they came in for a reservation. I had no clue about commission rates; that’s why I started with 5 percent. To me, it sounded very logical that hotels themselves should know the best room rate they can charge at any time. From the beginning, it was the hotel that decided what the rate should be on the website.

Active Hotels in the UK and Bookings.nl in the Netherlands launched separately using the agency, or pay-at-the-hotel, business model while large U.S.-headquartered companies such as Expedia, Hotels.com, and Priceline.com were having various levels of success in Europe. These major online travel agencies focused on big hotel chains, which weren’t as important in Europe. Expedia and Hotels.com were enamored with the higher-commission merchant model, which required travelers to pre-pay for their hotel stays, and that just wasn’t the way things were done in Europe. Priceline.com was trying its Name Your Own Price bidding model in the UK and elsewhere internationally, and it wasn’t getting traction outside the United States.

Bookings.nl merged with the UK’s Bookings Online in 2000. In 2002, Barry Diller’s USA InterActive/IAC acquired Expedia, and came close to buying Geert-Jan Bruinsma’s Bookings.nl in Amsterdam. Separately, in 2003, IAC/Expedia signed a non-disclosure agreement with the UK’s Active Hotels, but a deal never materialized. Together, these decisions may have arguably amounted to the biggest missed opportunity in online travel history.

In July 2005, Priceline.com acquired Bookings B.V. for $133 million. Although the joint operation and merged companies — Active Hotels and Bookings — would eventually take the name Booking.com, it is interesting to note that Priceline paid more for Active Hotels, buying it in 2004 for $161 million, than it did for Bookings. Now the focus became to integrate the two companies, which at that time had 18,000 properties combined, the largest inventory among online players in Europe. In the grand scheme of things, the integration went remarkably well, although it was at times a tough marriage between Active and Bookings. There were cultural differences and clashes among the teams; most of the Active Hotels leadership left after a year or two. In both deals, management reinvested a portion of the acquisition proceeds back into their respective businesses.


Where to go after product-market fit: An interview with Marc Andreessen

So winning the market is the big thing. The thing that is so essential that people need to understand is that the world is a really big place. The good news is that markets are bigger than ever. There are more consumers on the internet than ever before. There are more businesses that use software than ever before.

Number two is getting to the next product. We are in a product cycle business. Which is to say that every product in tech becomes obsolete, and they become obsolete pretty quickly. If all you do is take your current product to market and win the market, and you don’t do anything else — if you don’t keep innovating — your product will go stale. And somebody will come out with a better product and displace you.

If you do take the market, you tend to have the financial resources to be able to invest heavily in R&D. And you also develop M&A currency, so you can then go buy the second product if you have to. It gives you another option to get to the second product.

The general model for successful tech companies, contrary to myth and legend, is that they become distribution-centric rather than product-centric. They become a distribution channel, so they can get to the world. And then they put many new products through that distribution channel. One of the things that’s most frustrating for a startup is that it will sometimes have a better product but get beaten by a company that has a better distribution channel. In the history of the tech industry, that’s actually been a more common pattern.

But then the third thing you need to do is what I call “everything else,” which is building the company around the product and the distribution engine. That means becoming competent at finance, HR, legal, marketing, PR, investor relations, and recruiting. That’s the stuff that’s the easiest to put to one side — for a little while. If you’ve got a killer product and a great sales engine, you can put that other stuff aside for a while. But the longer you put that stuff aside, the more risk that you develop and the more you expose yourself to catastrophic failure through self-inflicted wounds.

And so at some point, if the early guys don’t get to the other 95% of the market, somebody else is going to go take it away. And whoever has 95% of the market, number one they’re going to get all the value. All the investment returns, all the employee compensation flows to that company. And then number two, that company then accretes resources so they can work backward. In a lot of cases, they end up buying the company that got the early adopters for a small percentage of their equity, and then they just take the whole thing.

One interesting question I have is: Would you rather have another two years’ lead on product, or a two years’ lead on having a state-of-the-art growth effort?

First of all, raising prices is a great way to flesh out whether you actually do have a moat. If you do have a moat, the customers will still buy, because they have to. The definition of a moat is the ability to charge more. And so number one, it’s just a good way to flesh out that topic and really expose it to sunlight. And then number two, companies that charge more can better fund both their distribution efforts and their ongoing R&D efforts. Charging more is a key lever to be able to grow. And the companies that charge more therefore tend to grow faster.

Consumer startups are dead. Long live consumer startups.

The unicorns of the 2013 and 2104 vintages of consumer companies should have matured already, and the number of consumer unicorns won’t change substantially even if we wait several more years. Enough time has passed for hit enterprise startups from 2013 and 2014 to break out, making those vintages mature.

It starts first and foremost with the network effects that the Empire has that translated so well to the smartphone. The world has seen dominant consumer companies before — from Walmart to Disney to Nike to AOL — but never consumer companies that had this ability to connect all their mobile users together for the benefit of the entire ecosystem. More Snapchat users leads to better content shared and choices for people to instantly communicate with (direct network effect). More Apple iPhone users leads to better network infrastructure like 4G that improves the mobile experience (indirect network effect). More Uber drivers leads to cheaper and faster rides for passengers (two sided network effect). And so forth. The Empire grows stronger with every like, share, click, ride, pin, post, watch, buy, publish, and subscribe.

Next, every consumer company obviously needs consumers to be successful, and the Empire has unparalleled distribution advantages. Facebook and Google’s distribution power is obvious and it’s no coincidence that those two companies have 11 products between them that each have more than 1 billion monthly active users. But Netflix and Amazon also have tremendous distribution advantages. Netflix retains their subscribers better than anyone in the business — less than 1% cancel each month, which is about 5 times better than other video subscription services. That allows them to spend more for each subscriber (about $100) than other services because subscribers will stick around longer to payback that marketing expense. Amazon has launched 100 private label brands and grown them quickly because they can redirect shopping traffic towards their own products. For example, Amazon’s private label isn’t just the preferred option when purchasing batteries through Alexa; it’s the only option. So perhaps not as obvious as Facebook and Google, Netflix and Amazon’s distribution powers are just as potent.

Finally, it takes world class product and engineering talent to build great consumer products and the Empire has amassed one of the largest and most talented army of builders in the world. Amazon is the single largest spender in the entire country on research and development at $22.6 billion dollars last year. Apple, Google, and Facebook aren’t far behind as all three rank in the Top 10. And not only is the Empire army the biggest on the field, they are also given unique insights and capabilities that no one else has. For example, Apple iOS application engineers can utilize features of the platform (known as private APIs) that other mobile developers are not allowed to use in their apps.

Google CEO Sundar Pichai revealed a jaw-dropping fact about its translation app that shows how much money is still sitting on the table

The app translates a staggering 143 billion words every day, Pichai said. And, he added, it got a big boost during this summer’s World Cup soccer tournament.

Given that a lot of people most likely use the translation app while traveling, it’s not a stretch to imagine ads for local hotels, restaurants, and other traveler-oriented attractions. Even if a Google Translate user isn’t traveling, the app could offer pitches for travel guides and language schools. And as Google continues to enhance the translation app with new features, the business opportunities are likely to expand. There could even be potential for an enterprise business opportunity, by allowing other companies to leverage the technology into their products.


The future of media

In 2018 alone, Netflix CEO Reed Hastings said Netflix will spend over $10 billion on new content, release 80 new films, and premier an astonishing 700 new television shows. For context, the top six movie studios released 75 movies in 2017—combined. From a customer’s point of view, this an unprecedented value proposition: For the price of two lattes per month, you gain access to some of highest-rated and most-watched television shows and movies on the planet. From the industry perspective, this is what drives studio executives and networks insane: Netflix uses its war chest of capital to buy and finance new projects, often out-bidding other buyers of content and acquiring international rights.

By owning the direct relationship between customer and content, Netflix and the other subscription-based streamers have an incredible advantage. In any business, customers go to the providers with the best value proposition—and right now, over-the-top (OTT) streaming has the best value. Netflix wouldn’t dare sully the viewing experience with clunky, annoying advertisements. And because of their subscriber-based business model, they don’t have to.

In 2019, for instance, Disney plans to launch its own direct-to-consumer subscription service. Time will tell if this will work, but it’s our view that it’s too little too late. Yes, Disney holds the keys to lucrative properties within Pixar, Marvel, LucasFilm, etc. And launching the service with a Star Wars movie or television show will certain get some traction. But by 2019, that “distribution ship” will likely have already sailed. Netflix and Amazon will have hundreds of millions in combined viewers, and Disney will be starting from scratch. While the Mouse House may certainly find a core audience hungry for their content, its own subscription service may not justify itself—and it would not be shocking to find Disney looking for a distribution partner in someone like Amazon, who will already has over 100 million Prime subscribers.

Airbnb offers investors a unique stay

Airbnb was conceptualized in August 2007 as an alternative to hotel lodging. We calculate it is now the largest player in the $150 billion alternative accommodation booking market with a high teens share, up from about 4% in 2014. We estimate that roughly half of the market’s bookings occur online, with Airbnb holding around 35% online share today versus about 10% in 2014.

We believe a premium is warranted based on several attractive features Airbnb offers investors, including (1) a powerful and rare network advantage that should drive continued share gains in a rapidly growing alternative accommodation market; (2) an opportunity to expand its network and addressable market into hotel, experiences, corporate, and transportation; and (3) strong profitability prospects driven by high consumer awareness, allowing the company to leverage top-line growth. We believe Airbnb’s IPO should be on the radar screens for investors seeking exposure to a company positioned to gain share in the nearly $700 billion global online travel market, which we estimate will grow 9.4% annually on average over the next five years.

We estimate that Booking Holdings is already second behind Airbnb in the private accommodation market, having expanded its online share to roughly 20% last year from the midteens in 2015 driven by industry-leading supply and demand ((over 5 million alternative accommodation listings and around 450 million monthly visitors). We expect Booking to continue to see share gains at the expense of smaller competitors as it invests further in its non-hotel network with the goal to become the leader in the market. We estimate that its alternative accommodation booking growth rate can begin to eclipse Airbnb’s in 2020, as Booking’s investments and powerful network advantage take hold.

We think Airbnb can gain traction in the corporate booking market, which we estimate at around $1.1 trillion, as its partnerships and initiatives reduce the back-office and safety concerns of many global firms, aiding its network advantage and growth opportunity. The company has announced several major partnerships in the past few years.

The global air and ground transportation markets are large at around $600 billion and $100 billion, respectively, but the consolidation and efficiency of the industry offers only low-single-digit take rates (compared with teens and 20% for lodging and experiences, respectively). We wouldn’t expect transportation attached rates on Airbnb lodging bookings to be more than a single-digit level, since the company can’t offer any differentiated experience. Also, travelers love to shop around for the best deal, especially in a commoditized environment like transportation. We expect just 1%-2% of Airbnb’s total revenue to come from the segment in 2022, following an anticipated launch into these markets in 2019.


EBay paid $573M to buy Japanese e-commerce platform Qoo10, filing reveals

The acquisition of Qoo10 underscores how eBay is at the same time pulling back from general plays while doubling down on more targeted opportunities. Earlier this year, the company gave up its stake in Flipkart as part of its acquisition by Walmart, but at the same time committed to investing in a new, standalone eBay operation in India, using some of the $1.1 billion in proceeds it made from selling its Flipkart stake to Walmart.

But eBay isn’t going to go head-to-head with those two. Instead, its India operations will focus on cross-border sales, so essentially looking to connect buyers and sellers in the country with opportunities overseas within its network. That’s the same model it has used to effect in other parts of the world, so its acquisition of Qoo10 and its other international services will be a key part of that India strategy, and vice versa.


How e-commerce is transforming rural China | The New Yorker

Establishing this reputation has required JD to adopt a strategy radically different from that of its greatest rival, Alibaba, which is essentially the eBay of China—a platform connecting customers to a vast network of third-party sellers. Although there are an increasing number of third-party sellers on JD’s site, the core of its business, like Amazon’s, involves managing the entire supply chain. It buys from manufacturers, stocks inventory in warehouses, and invests billions of dollars in development, including a kind of in-house FedEx, called JD Logistics. There are now nearly eighty-five thousand delivery personnel like Xia, and several thousand depots, from large hubs to tiny outlets like the one in Xinhuang. “The couriers are the faces of JD,” Liu said. “They come to your home. You have to trust them.” The success of this network, combined with the notorious unreliability of the Chinese postal service, means that JD Logistics is now itself a product—a service that other e-commerce players pay to use.

Chen explained that JD’s burgeoning focus on luxury was a consequence not only of the rise of a moneyed middle class but also of the middle class’s relative youth. Buyers of big-ticket items are five to ten years younger than their Western counterparts. “Most of them experience, and learn about, luxury brands over the phone,” she said. “So digital becomes increasingly important.”


Is JD.com the future of Chinese e-commerce?

When breaking down the costs to fulfill an order from the warehouse to the customer’s front door, about 30-35% of costs go to warehousing, another 20-25% to transporting products from the warehouse to local delivery hubs, and 40-45% to last-mile delivery, which is mostly human labor costs and transportation costs. However, this cost structure is mostly indicative of urban, densely populated regions that have large fulfillment centers and dedicated last-mile delivery staffs. Most rural cities are quite different in that they don’t have sophisticated layers of network infrastructure. For example, large fulfillment centers are replaced by small delivery depots or mom-and-pop shops acting as pick-up centers. Since most consumers pick up their packages at these centralized locations, large last-mile delivery staffs are not required. It’s hard to say if drones would result in cutting logistics costs 70% on its own, but overall the fulfillment process could achieve significant savings.

JD has always approached its business from a customer’s perspective, utilizing an integrated retail and logistics model to provide a superior experience. In JD’s early days, 70% of customer complaints involved delivery service, since China’s logistics infrastructure was essentially nonexistent. To solve this issue, JD founder Richard Liu decided to take operations in-house, recognizing this would be a critical differentiator in providing the best customer experience. JD now delivers 90%+ of direct retail orders within 24 hours, an unfathomable achievement in markets outside of China. But as other businesses eventually catch up, the question turns to where future differentiation will lie.

By integrating deeper into the supply side, JD can continue to structurally lower its cost of goods and average selling prices. While Alibaba can spur competition between merchants, lowering their gross margins in the meantime, the fragmented nature of the supply side means there isn’t structural pressure to the cost of goods side of Alibaba’s model, meaning prices can only fall so much. As JD’s lowers prices, receives inventory on more of a “just-in-time” basis, it will turn inventory quicker meaning it can lower prices even more.

The incredible rise of Pinduoduo, China’s newest force in e-commerce

Pinduoduo’s C2B model allows it to ship directly from the manufacturers eliminates layers of distributors, not only reduces the price tag for buyers but also raises the profit of manufacturers. This approach is particularly effective for the sales of perishable agricultural and fresh products, where the speed for matching supply and demand is critical.

Lesser-known brands were chosen over famous brands to erase any premium that comes from branding. Additionally, the costs for advertising and marketing are also lowered through user sharing to social media. The approach is both cost-saving and effective. Through social sharing, users are sending the product information precisely to friends and groups that may have similar income and consumption preferences. Viral marketing is a more clever way to build the identity of all the lesser-known brands on its platform. Financially, the platform could even out part of discounts with less marketing budgets.

 

BlackRock ready to spread its web across Europe

Having started as part of private equity company Blackstone 30 years ago, BlackRock is the world’s largest money manager with 70 offices globally. It manages $6.3tn assets on behalf of clients in 100 countries.

Europe, the Middle East and Africa accounts for 28 per cent of its total assets under management. The region’s 3,800 staff make up 27 per cent of its global workforce while the $4.1bn of revenue from Emea was 30 per cent of BlackRock’s total last year.

BlackRock has built connections with financial adviser networks tied to banks and insurers and believes it can offer complementary products. Domestic financial institutions do not see it as a significant threat when compared with local rivals.

ARK Disrupt Issue 134: eSports, AI, crypto, fintech, balloons, & CRISPR

Twitch’s viewership in June approached 800 million hours, or 9 billion hours at an annual run-rate. How much could 9 billion hours of viewership be worth? A lot!

NFL broadcast rights provide some good perspective. The NFL enjoys roughly 6 billion in hours viewed annually,1 and in 2013 it sold nine years of broadcast rights for roughly $40 billion.2 We expect Twitch’s viewership to be double that of the NFL by next January and to double again within our five-year investment time horizon. What would broadcasters pay for the perpetual rights to four NFLs, especially if they didn’t have to ship crews and cameras all over the country and could monetize the content more efficiently?

Video game streaming is linked to monetization in a way not possible for traditional sports. Viewers pay subscriptions and sometimes tip individual streamers—from which Twitch extracts a platform fee—and, in real time, streamers can thank their viewers for contributions. On their channels, streamers often interact with viewers, sometimes taking direction from them. With stronger social and economic network effects, Twitch’s engagement and monetization should be able to top that of traditional broadcast channels.

While Google has said that Loon should be able to deliver internet service for $5 per month per user, ARK estimates that it could offer even lower prices, say $4 per month. At that rate, if Loon were able to deliver internet access today to everyone in the world with enough income to afford it, its subscription revenue could approach $130 billion, roughly equivalent to estimates for Alphabet’s total sales in 2019.3 More realistically, Loon will share this market with other forms of internet delivery, such as low earth orbit satellites, but Alphabet’s opportunity is vast nonetheless.

DAU/MAU is an important metric to measure engagement, but here’s where it fails

If your product is a high-frequency, high-retention product that’s ultimately going to be ads supported, DAU/MAU should be your guiding light. But if you can monetize well, develop network effects, or quite frankly, your natural cadence isn’t going to be high – then just measure something else! It’s impossible to battle nature… just find the right metric for you that’s telling you that your product is providing value to your users.

Retailers ubiquitously choose Instagram over Snapchat. Nearly all retailers tracked in Gartner L2’s Digital IQ Index: Specialty Retail air Instagram Stories; in contrast, only 4% were active on Snapchat during the study period.

Restaurants must embrace online delivery, and fast

Just 1.6 percent of all restaurant industry transactions in 2017 were conducted online for delivery, according to a report by Cowen Inc. restaurant industry analyst Andrew Charles. The same analysis estimates that online delivery accounted for $19.7 billion in gross merchandise volume, or 3.7 percent, of U.S. restaurant sales in 2017. That’s roughly in line with the proportion of retail sales that had moved online by 2008. And we all know how different the mall landscape is now compared to 10 years ago.

And restaurants may even find themselves wanting to change their menus. Uber Eats has been using its data to help local restaurants launch delivery-only menus. In Chicago, it found people were searching for suddenly popular Hawaiian poke, but there weren’t many options. So Uber Eats reached out to neighborhood sushi spots, which would already have some of the same ingredients, and asked them to try making the dish for the app. Imagine how transformative those kinds of insights could be if applied at the scale of a chain restaurant.

Delicious new protein source, starting with a salmon burger: Terramino Foods

Animal farming takes up over 70% of the planet’s agricultural land, and 70% of the world’s available freshwater and energy consumption. Animal production consumes more than 1/3 of raw materials and fossil fuels in the US. It is responsible for 18% of the total release of greenhouse gases , 9% of global CO2, 80% of ammonia emissions in the U.S. come from animal waste.

Globally, fish account for approximately 4 of every 10lbs of animal products consumed. To meet the growing demand, 90% of global fish stocks are overfished. Global fisheries are expected to collapse by 2048. And there is growing risk in human health with high levels of mercury, PCBs, dioxins and other health containments.

But unlike chicken, pork and beef alternatives becoming more available, seafood alternatives are virtually non-existent. Alternative seafood options are very limited even at Whole Foods, and the taste and quality for these select products are subpar. We’ve realized there’s a gaping hole in alternative seafoods.

Escalating the US trade war is not in China’s interest. Reform is what it must do

The economic significance of the tariffs has been hugely exaggerated: 25 per cent on US$34 billion is an extra US$8.5 billion. China’s exports are likely to top US$2.4 trillion in 2018. The tariff impact is therefore symbolic. Even the 10 per cent tariff on US$200 billion only amounts to an additional US$20 billion. The numbers are not big, in relative terms.

The tariffs shouldn’t significantly affect China’s competitiveness. China’s labour cost is less than one-fifth of the OECD level. Adding 10 or 25 per cent to it won’t affect China’s competitive position relative to the US or other developed economies. While some production could relocate to other emerging economies, they just don’t have the scale to take over significant value chains from China.

The best option is to reform now and appreciate the currency later. The current trade dispute could be used as a catalyst to initiate reforms. If others complain that China’s industrial policy contains excessive government subsidies, why not scale them back and rely more on the market to create business and advance innovation? What have the subsidies done for the economy so far? After pouring in tens of billions of dollars, has China produced one significant innovation? The chances are that the market can do better.

Why we need to update financial reporting for the digital era

Digital companies, however, consider scientists’ and software workers’ and product development teams’ time to be the company’s most valuable resource. They believe that they can always raise financial capital to meet their funding shortfall or use company stock or options to pay for acquisitions and employee wages. The CEO’s principal aim therefore is not necessarily to judiciously allocate financial capital but to allocate precious scientific and human resources to the most promising projects and to pull back and redeploy those resources in a timely manner when the prospects of specific projects dim.

Digital companies, in contrast, chase risky projects that have lottery-like payoffs. An idea with uncertain prospects but with at least some conceivable chance of reaching a billion dollars in revenue is considered far more valuable than a project with net present value of few hundred million dollars but no chance of massive upside.

As firms become increasingly difficult to value and more and more companies report negative earnings, analysts perform multiple adjustments to recreate companies’ financials in their internal assessments. For example, they capitalize a part of R&D expenditures that can enhance firm’s future competitive ability and deduct a part of capital investments that merely maintain firms’ competitive ability. This is an outcome of the growing divergence between what companies consider as value-creating metrics and those reported as profits in the GAAP.

For instance, standard-setters might want to encourage disclosures related to (i) value per customer; (ii) earnings or revenue outcomes or other specific metrics related to specific projects in progress; and (iii) data on how the R&D and software talent of digital firms is being deployed. Relying on firms’ voluntary initiatives is unlikely to work because executives told us time and again that they will not disclose sensitive information, unless their competition is forced to do the same.

A whiff of rotten eggs may augur an oil shock

For years, cargo ships have been powered by about 4 million barrels a day of the dirtiest, bottom-of-the-barrel fraction of crude, a tarry substance known as bunker fuel or residual fuel oil. That’s set to change in less than 18 months, after the International Maritime Organization adopted rules that would keep the sulfur content of the bunker fuel on standard ships below 0.5 percent from Jan. 1, 2020.

The likelier outcome is that refiners will blend each barrel with about three of lower-sulfur fractions — principally gasoil or middle distillate, essentially the same stuff as automotive diesel — to get the proportion down from 2015’s average of 2.45 percent. But that, of course, will require an additional 2 million barrels a day or so of lower-sulfur fuel, and it’s not clear that the world’s refiners can shift so fast.

That, and the widening discount of January 2020 fuel oil over Brent, gives weight to a more pessimistic analysis: Shortages in the heaviest fractions of the barrel will drive up the prices of gasoil, jet fuel and gasoline, boosting the cost of crude itself until the market rebalances.

Curated Insights 2018.07.20

Professor Aswath Damodaran on valuation

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

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

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

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


How internet advertising can grow to $600 billion by 2023

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

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

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

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


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

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

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


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

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

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

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

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

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

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

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


Amazon set for Prime Day ad revenue bonanza

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

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


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

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

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

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

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


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

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

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

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

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

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

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

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

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

How has the average US house size changed?

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

Curated Insights 2018.07.13

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

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

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

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

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

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

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

How Amazon steers shoppers to its own products

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


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

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

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

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

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

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

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

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


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

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

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

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


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

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

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

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

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

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

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

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

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

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


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

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

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

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


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

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

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

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

Harvard study: Heat slows down the brain by 13%

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

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

Curated Insights 2018.07.06

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

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

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

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

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

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

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


Dropbox vs. Box: The story of enterprise SaaS multiples

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

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

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

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

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

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

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


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

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

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

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

WeChat Impact Report 2018 shows impressive social impact

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

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

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

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

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

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


Better ways to learn

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

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

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

Curated Insights 2018.06.29

75% of bull markets are nothing but multiple expansion

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

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

Amazon’s scale in Japan challenges rivals and regulators

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

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

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


Amazon wants the whole package in delivery

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

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

Danny Meyer’s recipe for success

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

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

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

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

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

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

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

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

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


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

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

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


The business of death has a bright future in Japan

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

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

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

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

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

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

Where 3 million electric vehicle batteries will go when they retire

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

Introducing a16z crypto

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

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

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


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

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

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

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