Curated Insights 2018.09.21

Brent Beshore: Learning to pole vault

Marketing will only get you where you’re going faster. If your product isn’t valuable, marketing will help put you out of business, fast. The best way to build trust and generate attention is to be relatively excellent. I say “relatively” because some markets are more efficient/mature than others. The less developed a market, the less valuable you have to be in absolute terms. You just have to be better than everyone else. I don’t want to try to outcompete smart, well-read, and hard working people. I want to find the lowest bar to jump over and then get good at pole vaulting.

Picking your field is arguably more important to your success than your current skill and future capacity. In some segments of business, everyone makes lots of money and the very best do outrageously well. In other areas, even the very best often declare bankruptcy. It’s a base rate analysis. Assume you’re only going to be mediocre, then explore what business and life look like if that’s true. So choose your field wisely and get good at what you’re doing before trying to make noise.

AI has far-reaching consequences for emerging markets

Without a cost incentive to locate in the developing world, corporations will bring many of these functions back to the countries where they’re based. That will leave emerging economies, unable to grasp the bottom rungs of the development ladder, in a dangerous position: the large pool of young and relatively unskilled workers that once formed their greatest comparative advantage will become a liability – a potentially explosive one.

The result will be an unprecedented concentration of productive capacity and wealth in the hands of the elite AI companies, almost all of which are located in the US and China. Of the US$15.7 trillion in wealth that AI is forecast to generate globally by 2030, a full 70 per cent will accrue to those two countries alone, according to a study by consulting firm PwC.

Spotify will now let indie artists upload their own music

According to a recent report by The NYT, artists working with labels may see much smaller percentages. The report said that Spotify typically pays a record label around 52 percent of the revenue generated by each stream. The label, in turn, then pays the artist a royalty of anywhere from 15% to as high as 50%. If artists are dealing directly with Spotify, they could be making more money.

Labels suggested that they could retaliate against Spotify for overstepping. The NYT had also said. They may do things like withhold licenses Spotify needs for key international expansions, like India, or not agree to new terms after existing contracts expire. They could also offer more exclusives and promos to Spotify’s rivals, like Apple Music, which has surged ahead in the U.S. and is now neck-and-neck here with Spotify for paid subscribers.

A music upload feature also means artists who own their own rights could break out big on Spotify if they catch the attention of playlist editors – something that Spotify now makes it easier for them to do, as well. In addition, having indies upload music directly means Spotify could better compete against Apple Music by attracting more artists and their fans to its platform.


Apple’s neural engine = Pocket machine learning platform

If you have followed many of the posts I’ve written about the challenges facing the broader semiconductor industry, you know that competing with Apple’s silicon team is becoming increasingly difficult. Not just because it is becoming harder for traditional semiconductor companies to spend the kind of R&D budget they need to meaningfully advance their designs but also because most companies don’t have the luxury of designing a chip that only needs to satisfy the needs of Apple’s products. Apple has a luxury as a semiconductor engineering team to develop, tune, and innovate specialized chips that exist solely to bring new experiences to iPhone customers. This is exceptionally difficult to compete with.

However, the area companies can try with cloud software. Good cloud computing companies, like Google, can conceivably keep some pace with Apple as they move more of their processing power to the cloud and off the device. No company will be able to keep up with Apple in client/device side computing but they can if they can utilize the monster computing power in the cloud. This to me is one of the more interesting battles that will come over the next decade. Apple’s client-side computing prowess vs. the cloud computing software prowess of those looking to compete.


Tim Cook reveals in interview that the Chinese consumer is different because they don’t carry the burden of the desktop era

China has not experienced the so-called stage of the desktop Internet, but directly embraced the mobile Internet. Therefore, Chinese consumers do not have the burden of the desktop Internet era. This explains to some extent why China’s mobile payment share is so high. In other countries, the mobile payment process is much slower. In fact, they just have no more attempts.”

Perhaps Apple’s delay in advancing Macs and angering the pro community comes from this deep seated attitude that it’s a “burden” holding back the advancement of their iOS agenda.

The best company you’ve never heard of

With no true competitive threats, wide-moat commercial real estate data provider CoStar Group is a borderline monopoly. The other companies in the space are predominately small startups focused on crowdsourcing data. These companies can’t replicate the intangible assets from the vast cost and effort associated with compiling the data the company offers to its customer base.

Given the importance customers place on the underlying data, CoStar also keeps competitors at bay with a switching cost moat source. It’s just too risky to switch sources. Strong platform effects found throughout CoStar’s product offerings earn the company a network effect moat source, too.

The company continues to increase its coverage and boasts that it covers every building in the country, widening the gap between itself and its fragmented competition. The firm recently established itself as a leading provider of rental data with its acquisitions of Apartment Finder and Apartments.com. CoStar is only 30% penetrated in its target market for apartments, so we see room for growth in this area.

Moreover, CoStar is only 15% penetrated in the broker community and 7% penetrated with institutional investors, two groups we can see the firm going after. As several investments are integrated and benefits are realized, we project CoStar’s economic profit to steadily increase over the next several years, reflecting our positive moat trend rating.

Here’s why Yelp and Grubhub could keep rising

“Grubhub is in the early stages of enabling the shift to online of the still offline dominant restaurant takeout businesses and driving the improved consumer experience that comes with it,” they wrote. About “90% of delivery and pickup orders still come from offline, making the phone book, print out menus and walk-ins the number one competitor to Grubhub and its peers.”

How early is the shift? “We estimate Grubhub has about 40% market share of the third-party online delivery/pickup industry which itself we estimate has a 4% penetration of the $250 billion restaurant takeout industry,” they wrote. “Its early mover and scale advantage—about 85,000 restaurants on its platform in 1,600 cities—has allowed Grubhub to offer, in our view, the best consumer value across its competitors.”


Why Yelp could rise 200%

If we can introduce ourselves to those advertisers with a good ‘til canceled $300, $400 a month, $10, $20 a day kind of service proposition, what we’re finding is it really opens up our sales funnel. It makes our product more competitive in the marketplace. It allows us to get into third-party sales channels that we haven’t been in before. And we’re now kind of one quarter into it and we had this quarter, the first quarter, about 140% as many new or net customer additions in this quarter as we’ve had in any prior quarter and kind of 2x the run rate that we’ve normally seen when we were selling the term contract. And, now, we move to the non-term contract.

In the long-term, our tests and our analysis all show that the LTV of a cohort of advertisers that we bring in today will be quite a bit higher. And what we’ve seen in our tests is that we continue to sell the sort of long and strong loyal long-term advertisers under the new pricing model just as we always have, but on top of that we’re introducing ourselves to a lot more new customers along the way

Yelp is in the early days of elevating the consumer experience by expanding the number of transactional features such as Request-A-Quote from a home service professional or book a restaurant reservation or spa appointment. Request-A-Quote lead volume grew 27% from the first to the second quarter of 2018 and topped 5.5 million delivered requests in the second quarter. During that same short timeframe, revenue attributable to Request-A-Quote increased by more than 50%, surpassing a $35 million annual run rate at the end of the second quarter. The company is not yet fully monetizing Request-A-Quote, which we believe could accelerate free cash growth even further. We like finding misunderstood, yet promising, and free embedded call options within the companies we invest in and hope Request-A-Quote proves to a second material avenue for free cash per share growth.


GGV Capital: Unpacking Xiaomi’s IPO

Instead of paying for users, Xiaomi actually gets paid at least 5% gross margin through hardware to get users…it’s a very different model from almost any other internet services model out there. So if this is sustainable, and to make sure this is sustainable is to have a lot more hardware products out there that the middle class can buy, and use that portfolio of hardware devices to get paid for acquiring users, so that internet services can scale thereafter…There’s definitely elements of Muji and Uniqlo in a different field for Xiaomi, there’s definitely elements of a Costco model of subscription plus very low cost to make sure more products are affordable by the rising consumer class, there’s definitely elements of Amazon in there as a platform to sell many products and being very focused at delivering a superior experience…

If we look at the number of internet users coming online, the next 1.5bn internet users coming online between now and 2030, most of that growth will come from the 74 countries that Xiaomi is in already. So when people ask me if Xiaomi is coming to the US or not, they completely miss the point, the growth is coming from the existing countries that Xiaomi’s already in…

Xiaomi has over 18 apps, each with monthly active users of over 50mn. It also has 38 apps, each with over 10mn MAUs. In aggregate, it did over 1.5bn RMB in internet services revenue in 2017, which already puts them as a top 25 internet services only company in the world. The most popular [app] that people know is probably Xiaomi Video, which has an interesting way of becoming aggregation services. It doesn’t license content from anyone, what it does is it aggregates content from all the top Chinese video apps, each of which have already licensed the content and whenever a user clicks on a video, it takes you to the content from its partners but within the app itself, so you can have a more integrated experience. It charges advertising revenue and also subscription from the users…and they share that revenue with its partners that provide the original video content. So, it can focus on providing the most comprehensive collection of content to the user, at the same time, so far, they don’t have to spend much money on acquiring the content itself.”


Tesla, software and disruption

It’s pretty clear that electric disrupts the internal combustion engine, and everything associated with it. It’s not just that you replace the internal combustion engine with electric motors and the fuel tank with batteries – rather, you remove the whole drive train and replace it with sometime with 5 to 10 times fewer moving or breakable parts. You rip the spine out of the car. This is very disruptive to anyone in the engine business – it disrupts machine tools, and many of the suppliers of these components to the OEMs. A lot of the supplier base will change.

We will go from complex cars with simple software to simple cars with complex software. Instead of many stand-alone embedded systems each doing one thing, we’ll have cheap dumb sensors and actuators controlled by software on a single central control board, running some sort of operating system, with many different threads (there are a few candidates). This is partly driven by electric, but becomes essential for autonomy.

Tesla’s first bet is that it will solve the vision-only problem before the other sensors get small and cheap, and that it will solve all the rest of the autonomy problems by then as well. This is strongly counter-consensus. It hopes to do it the harder way before anyone else does it the easier way. That is, it’s entirely possible that Waymo, or someone else, gets autonomy to work in 202x with a $1000 or $2000 LIDAR and vision sensor suite and Tesla still doesn’t have it working with vision alone.

‘Flash Boys’ exchange IEX wins first listing

The U.S. corporate-listings business, in which companies pay fees to an exchange for services tied to being the primary venue for the company’s stock trading, has for years been an effective duopoly of the NYSE and Nasdaq. A third big exchange group, Cboe Global Markets Inc., lists exchange-traded funds and its own shares, but hasn’t made a bid to attract other companies. NYSE parent Intercontinental Exchange Inc. and Nasdaq earned a combined $684 million from listings last year, according to the two exchange groups.

“We at Interactive Brokers understand that being the first listing on a new exchange may entail certain risk, but we think that individual and institutional customers who own and trade our stock will receive better execution prices and that advantage will outweigh the risk,” Mr. Peterffy said in a press release announcing the move.

Because of China’s outsized workforce, the density of automation usage lags other countries: 68 robots per 10,000 industrial workers, compared with 631 bots for every 10,000 manufacturing staff in South Korea, the global leader in automation. Singapore, Germany and Japan all have higher densities of automation than China. China wants to more than double that usage density to 150 for every 10,000 workers by 2020. To do so would require massive amounts of government help.

‘Made In China 2025’: a peek at the robot revolution under way in the hub of the ‘world’s factory’

A skilled factory worker earns about 36,000 yuan a year in wages and benefits in China’s poorer provinces and second-tier cities, away from the coast. Total remuneration can exceed 60,000 yuan in cities nearer the coast and along the eastern seaboard, like in the Pearl River and Yangtze River deltas. A 200,000 yuan robot that can do the job of three humans can recoup its capital cost in 22 months in central provinces, or in a little over a year in coastal cities. In the face of rising prices pressures for labour, energy and rents, such a cost advantage would be attractive to many manufacturers.

China’s total spending on research and development is estimated to have risen 14 per cent last year to 1.76 trillion yuan, according to the Ministry of Science and Technology.

“Among the thousands of so-called Chinese robotics companies – including robot and automated equipment producers as well as those who only provide automation integration solutions – only about 100 firms could mass produce the main body and core components of high-end and middle-market industrial robots, such as servo motors, robot controllers and speed reducers,” he said. “We lack original research and have already tried to catch up by copying advanced technology. But neither technology-related mergers and acquisitions nor copycat [production] can close the gap in the short term.”

He said many domestic robotics manufacturers were still developing the traditional core parts of robots, like servo motors, robot controllers and speed reducers. But these parts would not be the core components of the future, he said.

Don’t take asset allocation advice from billionaires

One of the best ways to stay out of trouble with your finances is to focus all of your energy on your own circumstances and ignore what other people say or do with their money. Not only will it likely save you from making a grievous financial error but it will also make you happier. Constantly comparing yourself or your portfolio to others can be exhausting.

This is how to raise emotionally intelligent kids: 5 secrets from research

Don’t argue the facts. Feelings aren’t logical. You wouldn’t expect the new employee to know how to find the bathroom and you shouldn’t expect a child to know how to handle emotions that, frankly, you still have problems dealing with after decades of experience. Don’t immediately try to fix things. You need to establish you’re a safe ally before you can solve anything. Understanding must precede advice, and, just as with adults, they decide when you understand.

The critical distinction Gottman realized is that it’s important to accept all feelings — but not all behavior. If you skip immediately to problem-solving, the kid never learns the skill of how to deal with those uncomfortable emotions. You want to use “empathetic listening.” Get them to talk. Help them clarify. Validate their feelings (but, again, not necessarily their behavior). They need to feel you really understand and are on their side.

Providing words in this way can help children transform an amorphous, scary, uncomfortable feeling into something definable, something that has boundaries and is a normal part of everyday life. Anger, sadness, and fear become experiences everybody has and everybody can handle. Labeling emotions goes hand in hand with empathy. A parent sees his child in tears and says, “You feel very sad, don’t you?” Now, not only is the child understood, he has a word to describe this intense feeling. Studies indicate that the act of labeling emotions can have a soothing effect on the nervous system, helping children to recover more quickly from upsetting incidents.

As we have discussed earlier, the implications of teaching a child to self-soothe are enormous. Kids who can calm themselves from an early age show several signs of emotional intelligence: They are more likely to concentrate better, have better peer relationships, higher academic achievement, and good health. My advice to parents, then, is to help your kids find words to describe what they are feeling. This doesn’t mean telling kids how they ought to feel. It simply means helping them develop a vocabulary with which to express their emotions.

In an ideal world, we’d always have time to sit and talk with our kids as feelings come up. But for most parents, that’s not always an option. It’s important, therefore, to designate a time—preferably at the same period each day—when you can talk to your child without time pressures or interruptions.

Curated Insights 2018.09.14

Risk, uncertainty and ignorance in investing and business – Lessons from Richard Zeckhauser

People feel that 50% is magical and they don’t like to do things where they don’t have 50% odds. I know that is not a good idea, so I am willing to make some bets where you say it is 20% likely to work but you get a big pay-off if it works, and only has a small cost if it does not. I will take that gamble. Most successful investments in new companies are where the odds are against you but, if you succeed, you will succeed in a big way.” “David Ricardo made a fortune buying bonds from the British government four days in advance of the Battle of Waterloo. He was not a military analyst, and even if he were, he had no basis to compute the odds of Napoleon’s defeat or victory, or hard-to-identify ambiguous outcomes. Thus, he was investing in the unknown and the unknowable. Still, he knew that competition was thin, that the seller was eager, and that his windfall pounds should Napoleon lose would be worth much more than the pounds he’d lose should Napoleon win. Ricardo knew a good bet when he saw it.

…in any probabilistic exercise: the frequency of correctness does not matter; it is the magnitude of correctness that matters…. even though Ruth struck out a lot, he was one of baseball’s greatest hitters…. Internalizing this lesson, on the other hand, is difficult because it runs against human nature in a very fundamental way… The Babe Ruth effect is hard to internalize because people are generally predisposed to avoid losses. …What is interesting and perhaps surprising is that the great funds lose money more often than good funds do. The best VCs funds truly do exemplify the Babe Ruth effect: they swing hard, and either hit big or miss big. You can’t have grand slams without a lot of strikeouts.

Risk, which is a situation where probabilities are well defined, is much less important than uncertainty. Casinos, which rely on dice, cards and mechanical devices, and insurance companies, blessed with vast stockpiles of data, have good reason to think about risk. But most of us have to worry about risk only if we are foolish enough to dally at those casinos or to buy lottery cards….” “Uncertainty, not risk, is the difficulty regularly before us. That is, we can identify the states of the world, but not their probabilities.” “We should now understand that many phenomena that were often defined as involving risk – notably those in the financial sphere before 2008 – actually involve uncertainty.” “Ignorance arises in a situation where some potential states of the world cannot be identified. Ignorance is an important phenomenon, I would argue, ranking alongside uncertainty and above risk. Ignorance achieves its importance, not only by being widespread, but also by involving outcomes of great consequence.” “There is no way that one can sensibly assign probabilities to the unknown states of the world. Just as traditional finance theory hits the wall when it encounters uncertainty, modern decision theory hits the wall when addressing the world of ignorance.


Hank Paulson says the financial crisis could have been ‘much worse’

While Bear Stearns’ failure in normal markets would not hurt the U.S. economy, we believed that the system was too fragile and fear-driven to take a Bear Stearns bankruptcy. To those who argue that Bear Stearns created moral hazard and contributed to the Lehman failure, I believe just the opposite—that it allowed us to dodge a bullet and avoid a devastating chain reaction.

If Bear had failed, the hedge funds would have turned on Lehman with a vengeance. Lehman would have failed almost immediately and the result would have been much worse than Lehman’s September failure, which occurred after we had stabilized Fannie Mae and Freddie Mac and Bank of Americaacquired Merrill Lynch. I would hate to imagine what would have happened if this whole thing started before we’d stabilized Fannie and Freddie.

An interview with Tim Geithner on this topic was done recently at the Yale School of Management and he speaks much more authoritatively on the limits of the Fed powers than I, but here goes. While our responses may have looked inconsistent, Ben, Tim, and I were united in our commitment to prevent the failure of any systemically important financial institution. But we had a balkanized, outdated regulatory system without sufficient oversight or visibility into a large part of the modern financial system and without the necessary emergency powers to inject capital, guarantee liabilities, or wind down a non-banking institution. So we did whatever we could on a case-by-case basis.

For Lehman, we had no buyer and we needed one with the willingness and capacity to guarantee its liabilities. Without one, a permissible Fed loan would not have been sufficient or effective to stop a run. To do that, the Fed would have had to inject capital or guarantee liabilities and they had no power to do so. Now, here’s the point that I think a lot of people miss: In the midst of a panic, market participants make their own judgments and a Fed loan to meet a liquidity shortfall wouldn’t prevent a failure if they believed Lehman wasn’t viable or solvent. And no one believed they were.

AIG is a cautionary tale. We should not have let our financial regulatory system fail to keep up with modern financial markets. No single regulator had oversight visibility or adequate powers to deal with AIG. Its insurance companies were regulated at the state level, its holding company was like a giant hedge fund sitting on top of the insurance companies, and it was regulated by the ineffective Office of Thrift Supervision, which also regulated—get this—Countrywide, WaMu, IndyMac, GE Capital. They all selected their regulator. So you get the picture, it’s regulatory arbitrage.

And I’m concerned that some of the tools we effectively used to stave off disaster have now been eliminated by Congress. These include the ability of Treasury to use its exchange stabilization fund to guarantee the money market funds, the emergency lending authority the Fed used to avoid the failure of Bear and AIG, and the FDIC’s guarantee of bank liabilities on a systemwide basis, which was critical.

The global smartphone supply chain needs an upgrade

At the peak in October 2017, smartphone components accounted for over 33% of exports from Taiwan, 17% of those from Malaysia and 16% from Singapore. Smartphones comprise 6% of Chinese exports. Memory chips flow from South Korea and Vietnam; system chips from Malaysia, Taiwan and elsewhere; and displays from Japan and South Korea. Rich-world firms, such as Qualcomm, sell licences to use their intellectual property (IP). The parts are then assembled, mainly by armies of Chinese workers.

Apple and 13 of its chip suppliers earn over 90% of the total pool of profits from the Apple system. Meanwhile the tail of other firms doing more basic activities must pay for most workers, inventories and fixed assets (see chart). So they have in aggregate a weak return on equity, of 9%, and a net profit margin of just 2%. Their earnings have not risen for five years. They include assemblers such as Taiwan’s Hon Hai and niche component makers, some of which are visibly struggling. On August 22nd AAC Technologies, a specialist in making phones vibrate, said its second-quarter profits fell by 39% compared with the previous year.

Apple, Samsung and most semiconductor makers could ride out such tensions, with their high margins and cash-laden balance-sheets. But the long chain of other suppliers could not, given their razor-thin margins, big working-capital balances and fixed costs. Tariffs could push them into the red. Of the 132 firms, 52% would be loss-making if costs rose by just 5%. And a ZTE-style cessation of trade would be disastrous. If revenues dried up and the 132 firms continued to pay their own suppliers, short-term debts and wages, 28% of them would run out of cash within 100 days.

If you are running a big firm in the smartphone complex, you should be reimagining things in preparation for a less open world. In a decade, on its current trajectory, the industry will be smaller, with suppliers forced to consolidate and to automate production. It may also be organised in national silos, with production, IP, profits and jobs distributed more evenly around the world. Firms will need to adapt—or be swiped away.

The story of Box: A unicorn’s journey to public success

The early days of Box’s selling file sharing and collaboration have largely been replaced by big corporate wins. One measure of Box’s success is its penetration of the Fortune 500—from 52% in the second quarter of 2016 to 69% in the same quarter of fiscal 2019. About 58% of Box’s total revenue comes from enterprises of 2,000 employees or more.

In Box’s recently completed fiscal quarter, it closed 50 deals of more than $100,000, compared with 40 a year ago; 11 deals of more than $500,000, versus eight a year ago; and two deals of more than $1 million, compared with four a year ago. It expects a strong pipeline of seven-figure deals in the back half of this year.

But in encouraging its salespeople to pursue bigger deals, Box increasingly faces competition from deeper-pocketed competitors in a total addressable market pegged at $45 billion, based on market research by Gartner and IDC.

Soccer fans, your team is coming after you

At the time of its 2012 initial public offering, Man United counted 659 million fans worldwide. Analysts estimate the team’s revenue this year will be about 587 million pounds ($763 million) — just $1.16 per supporter. Twitter Inc. has just 338 million active monthly users, yet enjoys revenue of $2.4 billion and a market value of $27 billion.

Digital marketing provides the opportunity for teams to put themselves in the middle of the sale of a service or product. It’s not simply about using a website or an app to sell fans more jerseys or baseball caps. It’s about turning the team into a platform, a way of connecting brands to customers, in the same way as Facebook Inc. and Alphabet Inc. already do.

Much in the way that price-comparison websites charge insurers or credit card companies for connecting them to customers, a sports team could, for example, offer its own exclusive video content with another provider’s mobile phone contract and take a cut of the proceeds. If that meant each fan were to spend just one more dollar a year with the club, it would provide a significant boost to sales.


Alibaba-backed apparel-sharing company YCloset brings sharing economy to a new level

Founded in December 2015, YCloset charges a monthly membership fee of 499 yuan and allows female users to rent unlimited clothes and accessories country-wide. Furthermore, users can choose to buy the apparel if they like to and prices fluctuate according to the rent count. Thus far, 75% of the income comes from membership fees and the remaining comes from sales of clothing. YCloset positions itself as a company that offers affordable luxury, professional and designer brand clothing. The company hopes to have the top famous brand to drive the long-tail brands.

In terms of business model, YCloset gradually shifted from one-time supplier purchase to brand partnerships with clothing companies. Brand partnerships allow revenue sharing between YCloset and their partners. To these clothing companies, YCloset gave them a new revenue, at the same time, they may get consumer insights from the data YCloset collects. In the future, YCloset will have joint marketing campaigns with the brands and assist in incubating new brands.

Autonomous delivery robots could lower the cost of last mile delivery by 20-fold

Last mile delivery – the delivery of goods from distribution hubs to the consumer – is the most expensive leg of logistics because it does not submit to economies of scale. The cost per last mile delivery today is $1.60 via human drivers but could drop precipitously to $0.06 as autonomous delivery robots proliferate.

Autonomous delivery robots are roughly seven times more efficient than electric vehicles on a mile per kilowatt basis. The major costs for autonomous delivery robots are hardware, electricity, and remote operators. Unlike in electric vehicles, the battery is not the largest cost component in slow moving robots. Air resistance is a function of velocity squared, suggesting that a robot traveling at four miles per hour loses much less energy than a car traveling at highway speeds to air resistance. As a result, rolling robots do not require large batteries, lowering both hardware and electricity costs relative to more traditional electric vehicles.

If rolling robots enable last mile delivery for $0.06 per mile, artificial intelligence could be advanced enough to improve their unit economics. A remote operator responsible for controlling robots in difficult or confusing situations probably will oversee roughly 100 robots, accounting for more than half of the cost per mile, as shown below. As autonomous capability improves, remote operators should be able to manage larger fleets of robots, bringing down the costs per robot.


Hospitals are fed up with drug companies, so they’re starting their own

A group of major American hospitals, battered by price spikes on old drugs and long-lasting shortages of critical medicines, has launched a mission-driven, not-for-profit generic drug company, Civica Rx, to take some control over the drug supply. Backed by seven large health systems and three philanthropic groups, the new venture will be led by an industry insider who refuses to draw a salary. The company will focus initially on establishing price transparency and stable supplies for 14 generic drugs used in hospitals, without pressure from shareholders to issue dividends or push a stock price higher.


Harvard Business School professor: Half of American colleges will be bankrupt in 10 to 15 years

There are over 4,000 colleges and universities in the United States, but Harvard Business School professor Clayton Christensen says that half are bound for bankruptcy in the next few decades. Christensen and co-author Henry Eyring analyze the future of traditional universities, and conclude that online education will become a more cost-effective way for students to receive an education, effectively undermining the business models of traditional institutions and running them out of business.

Christensen is not alone in thinking that online educational resources will cause traditional colleges and universities to close. The U.S. Department of Education and Moody’s Investors Service project that in the coming years, closure rates of small colleges and universities will triple, and mergers will double.

More than 90 per cent of Chinese teens access the internet through mobile phones, says report

The proportion of Chinese children under 10 years old who use the internet – which was only 56 per cent in 2010 – reached 68 per cent last year. More than 90 per cent of Chinese minors, those aged up to 18, can now access the internet through mobile phone and over 64 per cent of primary school kids have their own smartphones. Nearly 85 per cent of Chinese minors use WeChat, compared to only 48 per cent five years ago, but Chinese juveniles are still more fond of QQ, while Chinese adults prefer WeChat as a social app.

Curated Insights 2018.08.17

Not enough people are paying attention to this economic trend

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

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

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


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

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

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

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

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

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

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

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

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

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

Ad tech firm poised to surge 50%

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

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

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

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

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


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

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

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

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

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


Tesla’s autonomous opportunity is severely underappreciated

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

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

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

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


Alibaba tweaks a controversial legal structure

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

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

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

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

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

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

What MoviePass can teach us about the future of subscription businesses

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

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

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

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

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

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

Why the future belongs to ‘challenge-driven leaders’

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

The trajectory of great ideas

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

Survivorship bias on wheels

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

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

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


Curated Insights 2018.07.06

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 2018.05.20

The spectacular power of Big Lens

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

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

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

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

The Moat Map

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

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

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

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

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

How much would you pay to keep using Google?

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

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


There is another

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

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


Subscriptions for the 1%

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

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

The Apple Services machine

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

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

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

MoviePass: the unicorn that jumped into Wall Street too soon

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

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

Cerebras: The AI of cheetahs and hyenas

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

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

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


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

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

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

China buys up flying schools as pilot demand rises

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

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

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

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

California will require solar power for new homes

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

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

Just half a percent

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

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

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

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

Curated Insights 2018.05.13

Who’s winning the self-driving car race?

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

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

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

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

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

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

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


Starbucks: A big deal should mean a sharper focus

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

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


Tinder: ‘Innovation’ can help it fight off Facebook

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

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

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


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

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


PayPal: How it can fight back against Amazon Pay

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

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

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

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

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

As Warren Buffett’s empire expands, many jobs disappear

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

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

The formula behind San Francisco’s startup success

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

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

Cheap innovations are often better than magical ones

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

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

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

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


The future of digital payments? Computational contracts, says Wolfram

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

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

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

A hedge-fund fee plan that only charges for alpha

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

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

Why winners keep winning

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

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

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

Curated Insights 2018.04.15

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

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


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

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


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

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

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

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

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

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


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

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

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


Amazon is not a bubble

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

Ensemble Capital Q1 2018: Netflix

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

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


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

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


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

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

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

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

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

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

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

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

How to understand the financial levers in your business

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

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

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

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


What it takes to out-sleuth wine fraud

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

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

Curated Insights 2018.04.08

The most important self-driving car announcement yet

The company’s autonomous vehicles have driven 5 million miles since Alphabet began the program back in 2009. The first million miles took roughly six years. The next million took about a year. The third million took less than eight months. The fourth million took six months. And the fifth million took just under three months. Today, that suggests a rate on the order of 10,000 miles per day. If Waymo hits their marks, they’ll be driving at a rate that’s three orders of magnitude faster in 2020. We’re talking about covering each million miles in hours.

But the qualitative impact will be even bigger. Right now, maybe 10,000 or 20,000 people have ever ridden in a self-driving car, in any context. Far fewer have been in a vehicle that is truly absent a driver. Up to a million people could have that experience every day in 2020.

2020 is not some distant number. It’s hardly even a projection. By laying out this time line yesterday, Waymo is telling the world: Get ready, this is really happening. This is autonomous driving at scale, and not in five years or 10 years or 50 years, but in two years or less.


Facebook, big brother and China

Whether users are OK with this is a personal judgment they make, or at least should be making, when using the services. In open and democratic societies, perhaps users are less worried about what large corporations, who can be secretly compelled to hand over data to the state, know about them. Users are protected by the rule of law, after all. If they are going to see advertising in exchange for content, storage and functionality, then they would rather see relevant than irrelevant advertising alongside their web pages, emails, photos, videos and other files. Most citizens are not criminals and not concerned about what the state knows – they just want to share their holiday photos and chat with each other and in groups via a convenient platform, knowing that Facebook can mine and exploit their data.

But in authoritarian states such as China which control what their citizens can see and which lack a reliable rule of law, such networks pose a bigger threat. Tencent, for example, with its billion active accounts, knows the social graph of China, who your friends and associates are, where you go, what you spend (if you use their payment app) and what you say to each other and in groups on the censored chat platform. Similarly Sina Weibo. The state security apparatus has access to all of this on demand, as well of course as access to data from the mobile phone operators. So even if you stay off the Tencent grid, if you use the phone network then the state will know a lot about anyone you call who is a user of these platforms, as well as being able to profile you based on your repeated common location with other users. All of this data is likely to be accessible to the state in China’s forthcoming Orwellian Social Credit System, a combination of credit rating with mass surveillance. Knowledge is power. No wonder then that China won’t allow Facebook into the game.

Nvidia announces a new chip… But it’s not a GPU

The new chip, NVSwitch, is a communication switch that allows multiple GPUs to work in concert at extremely high speeds. The NVSwitch will enable many GPUs – currently 16 but potentially many more – to work together. The NVSwitch will distance Nvidia from the dozen or so companies developing competing AI (artificial intelligence) chips. While most are focused on their first chips, Nvidia is building out highly scalable AI systems which will be difficult to dislodge.


Nvidia: One analyst thinks it’s decimating rivals in A.I. chips

[Nvidia CEO] Jen-Hsun [Huang] is very clever in that he sets the level of performance that is near impossible for people to keep up with. It’s classic Nvidia — they go to the limits of what they can possibly do in terms of process and systems that integrate memory and clever switch technology and software and they go at a pace that makes it impossible at this stage of the game for anyone to compete.

Everyone has to ask, Where do I need to be in process technology and in performance to be competitive with Nvidia in 2019. And do I have a follow-on product in 2020? That’s tough enough. Add to that the problem of compatibility you will have to have with 10 to 20 frameworks [for machine learning.] The only reason Nvidia has such an advantage is that they made the investment in CUDA [Nvidia’s software tools].

A lot of the announcements at GTC were not about silicon, they were about a platform. It was about things such as taking memory [chips] and putting it on top of Volta [Nvidia’s processor], and adding to that a switch function. They are taking the game to a higher level, and probably hurting some of the system-level guys. Jen-Hsun is making it a bigger game.

Nervana’s first chip didn’t work, they had to go back to the drawing board. It was supposed to go into production one or two quarters ago, and then they [Intel] said, ‘We have decided to just use the Nervana 1 chip for prototyping, and the actual production chip will be a second version.’ People aren’t parsing what that really means. It means it didn’t work! Next year, if Nervana 2 doesn’t happen, they’ll go back and do a Nervana 3.


Apple plans to use its own chips in Macs from 2020, replacing Intel

Apple’s decision to switch away from Intel in PC’s wouldn’t have a major impact on the chipmaker’s earnings because sales to the iPhone maker only constitute a small amount of its total. A bigger concern would be if this represents part of a wider trend of big customers moving to designing their own components, he said.

Apple’s custom processors have been recently manufactured principally by Taiwan Semiconductor Manufacturing Ltd. Its decision may signal confidence that TSMC and other suppliers such as Samsung Electronics Co. have closed the gap on Intel’s manufacturing lead and can produce processors that are just as powerful.

Live Nation rules music ticketing, some say with threats

Ticket prices are at record highs. Service fees are far from reduced. And Ticketmaster, part of the Live Nation empire, still tickets 80 of the top 100 arenas in the country. No other company has more than a handful. No competitor has risen to challenge its pre-eminence. It operates more than 200 venues worldwide. It promoted some 30,000 shows around the world last year and sold 500 million tickets.

Though the price of tickets has soared, that trajectory predates the merger and is driven by many factors, including artists’ reliance on touring income as record sales have plummeted.

Live Nation typically locks up much of the best talent by offering generous advances to artists and giving them a huge percentage of the ticket revenue from the door. Why? Because it can afford to. It has so many other related revenue streams on which to draw: sponsorships for the tour, concessions at venues, and, most of all, ticket fees. The fees supply about half of Live Nation’s earnings, according to company reports.

Critics say enforcement of the consent decree has been complicated by what they call its ambiguous language. Though it forbids Live Nation from forcing a client to buy both its talent and ticketing, the agreement lets the company “bundle” its services “in any combination.” So Live Nation is barred from punishing an arena by, say, steering a star like Drake to appear at a rival stop down the road. But it’s also allowed, under the agreement, to redirect a concert if it can defend the decision as sound business.

Roku’s business is not what you think

That’s far from the only ad inventory Roku has access to. The Roku Channel offers free-to-watch popular movies, which Roku sells ad time against. Many of Roku’s “free” channels are ad supported, with Roku having access to all or some of the ad time on many of those channels (not all of them).

While selling ads is the biggest piece of the company’s Platform business, there are some auxiliary sales as well. See those Netflix, Amazon, Pandora, YouTube, etc. buttons on your Roku remote? The company was paid to put them there. Additionally, some TV brands have licensed the right to include Roku OS right into their television set, another source of revenue.

All told, Platform revenue is 44% of total sales, and growing rapidly. In fact, it more than doubled in 2017, and has increased more than 3-fold over the past 2 years. Even better, Platform revenue carries a gross margin near 75%, meaning that already it makes up 85% of Roku’s gross profitability. Completing the trifecta of good news, Platform sales are far more recurring and reliable in nature than hardware sales, giving the company a firmer footing from which to expand their business. Bottom line here? Roku is not really a commodity hardware maker. It is more of a consumer digital video advertising platform.

There is no shortage of ways to get streaming content. And all of them are fighting tooth-and-nail for users. Google and Amazon practically give away their devices to get users into their ecosystem. Against that lineup, it really has very few competitive advantages. There is no meaningful lock-in to the platform. It is really quite simple and painless for a consumer to switch from a Roku to a competing offering. Getting new customers is even more of a dog fight.

Netflix makes up over 30% of streaming hours through Roku’s platform, but the channel provides essentially no revenue back. Same for Amazon, Hulu, and the most popular ad-supported video network in the world, YouTube. Roku relies on monetizing Roku Channel and other, less prominent content channels. However, there is nothing stopping those other channels from switching to a different ad provider, or (if they are large enough), building out their own.


Alibaba is preparing to invest in Grab

Alibaba leaned heavily on its long-time ally SoftBank — an early backer of Tokopedia and Grab — to get the Tokopedia deal ahead of Tencent. That’s despite Tokopedia’s own founders’ preference for Tencent due to Alibaba’s ownership of Lazada, an e-commerce rival to Tokopedia. SoftBank, however, forced the deal through. “It was literally SoftBank against every other investor,” a separate source with knowledge of negotiations told TechCrunch. Ultimately, Alibaba was successful and it led a $1.1 billion investment in Tokopedia in August which did not include Tencent.

CRISPR recorder

While the Cas9 protein is involved in cutting and correcting DNA, the Cas4 protein is part of the process that creates DNA and genetic memory. CRISPR evolved from a bacterial immune defense system in which bacteria destroy viral invaders. Now we are beginning to understand how bacteria detect the invaders and remember the encounters. With Cas4, bacteria can record these encounters in their DNA, creating a permanent ledger of historical events.

Our understanding of Cas4 is rudimentary, but its potential applications are provocative. Not only will it timestamp key events, but it should be able to monitor how an individual’s body works and how it reacts to different kinds of bacteria. A Cas4 tool should be able to fight antibiotic resistance, an important use case addressing a significant unmet need.

How do wars affect stock prices?

Our research is not alone in reaching this conclusion. A 2013 study of US equity markets found that in the month after the US enters conflict, the Dow Jones has risen, on average, by 4.0 percent—3.2 percent more than the average of all months since 1983. A 2017 study found that volatility also dropped to lower levels immediately following the commencement of hostilities relative to the build-up to conflict. During the four major wars of the last century (World War II, the Korean War, the Vietnam War, and the First Gulf War), for instance, large-cap US equities proved 33 percent less volatile while small-cap stocks proved 26 percent less volatile. Similarly, FTSE All Share and FTSE 100 volatility has historically fallen by 19 and 25 percent over one- and three-month horizons following the outbreak of conflict.

Regression to lumpy returns

Missing a bull can be even more detrimental than taking part in a bear. Following the two huge bear markets we’ve experienced this century, many investors decided it was more important to protect on the downside than take part in the upside. Risk is a two-way street and I’m a huge proponent of risk management, but investors have taken this mindset too far. Missing out on huge bull market gains can set you back years in terms of performance numbers because you basically have to wait for another crash to occur, and then have the fortitude to buy back in at the right time. I have a hard time believing people who missed this bull market because they were sitting in cash will be able to put money to work when the next downturn strikes.


How to talk to people about money

In the last 50 years medical schools subtly shifted teaching away from treating disease and toward treating patients. That meant laying out of the odds of what was likely to work, then letting the patient decide the best path forward. This was partly driven by patient-protection laws, partly by Katz’s influential book, which argued that patients have wildly different views about what’s worth it in medicine, so their beliefs have to be taken into consideration.

There is no “right” treatment plan, even for patients who seem identical in every respect. People have different goals and different tolerance for side effects. So once the patient is fully informed, the only accurate treatment plan is, “Whatever you want to do.” Maximizing for how well they sleep at night, rather than the odds of “winning.”

Everyone giving investing advice – or even just sharing investing opinions – should keep top of mind how emotional money is and how different people are. If the appropriate path of cancer treatments isn’t universal, man, don’t pretend like your bond strategy is appropriate for everyone, even when it aligns with their time horizon and net worth.

The best way to talk to people about money is keeping the phrases, “What do you want to do?” or “Whatever works for you,” loaded and ready to fire. You can explain to other people the history of what works and what hasn’t while acknowledging their preference to sleep well at night over your definition of “winning.”

Curated Insights 2018.03.04

The #1 reason Facebook won’t ever change

Google’s core DNA is search and engineering, though some would say engineering that is driven by the economics of search, which makes it hard for the company to see the world through any other lens. Apple’s lens is that of product, design, and experience. This allows it to make great phones and to put emphasis on privacy, but makes it hard for them to build data-informed services.

Facebook’s DNA is that of a social platform addicted to growth and engagement. At its very core, every policy, every decision, every strategy is based on growth (at any cost) and engagement (at any cost). More growth and more engagement means more data — which means the company can make more advertising dollars, which gives it a nosebleed valuation on the stock market, which in turn allows it to remain competitive and stay ahead of its rivals.

Facebook’s challenge is that their most lucrative market — the US and Canada — are saturated. And to keep making money in these markets — already a ridiculous $27 in ARPU for the last three months of 2017 — they need us to give more time and attention to them. This is a crisis situation for Facebook because it doesn’t make as much money from markets outside of the US and Canada. For the same three months, it made $2.54 in ARPU in Asia-Pacific, $1.86 in rest of the world, and $8.86 in Europe.


Netflix

And if you’re dependent upon advertising you’re done. The public will not sit for it, only the cheapest individuals will endure ads, and then the ads don’t work on them, because they’re so damn tight. No, the people advertisers want to reach are the spenders, which is why everybody’s now advertising on Amazon, check it out, that’s where the dollars change hands.

So the networks and other ad-supported channels are on life support. They’re dependent upon hits, which come and go, and what do I always say…DISTRIBUTION IS KING!

So, just having good content is not enough, you’re reinventing the wheel every season, you’re only as good as your last hit.

As for HBO… That’s a dying model. If the outlet were smart, they’d band together with Hulu or another player and release all episodes on the same day. People don’t like to wait, appointment viewing is passe. We want it all and we want it NOW!

As for Hulu, forget about it, it doesn’t have critical mass, and unlike Netflix, it’s only in America. Sure, the “Handmaid’s Tale” burnished the outlet’s image, but Netflix has more than that, “Narcos,” Stranger Things,” 13 Reasons Why,” “Wormwood”… A record company can’t survive on one act, you need a steady flow of product, which Netflix has. And it’s a virtuous circle, they keep adding subscribers to the point they’ve got more money and they spend it on the best creators! So they end up with the lion’s share of the viewers. Which is why Fox wanted out, why it sold to Disney.

Nobody wants to let Google win the war for maps all over again

The companies working on maps for autonomous vehicles are taking two different approaches. One aims to create complete high-definition maps that will let the driverless cars of the future navigate all on their own; another creates maps piece-by-piece, using sensors in today’s vehicles that will allow cars to gradually automate more and more parts of driving.

Alphabet is trying both approaches. A team inside Google is working on a 3-D mapping project that it may license to automakers, according to four people familiar with its plans, which have not previously been reported. This mapping service is different than the high-definition maps that Waymo, another Alphabet unit, is creating for its autonomous vehicles.

Mobileye argues that it’s more efficient and cost-effective to let the cars we’re driving today see what’s ahead. In January, the Intel Corp. unit announced a “low-bandwidth” mapping effort, with its front-facing camera and chip sensor that it plans to place in 2 million cars this year. The idea is to get cars to view such things as lane markers, traffic signals and road boundaries, letting them automate some driving. Mobileye says this will take less computing horsepower than building a comprehensive HD map of the roads would.

Hidden profits in the prescription drug supply chain

Analysts at Bernstein tried to get a better picture of how profitable these companies are by excluding the cost of the drugs that are included in their revenue. The analysts compared the rate at which gross profit converts into earnings before interest, taxes, depreciation and amortization for pharmacy-benefits managers and other pieces of the drug supply chain, including drug distributors, insurers and pharmacies.

By this analysis, pharmacy-benefit managers are exceptionally profitable; 85% of their gross profit converted into Ebitda over the past two years. Drug distributors converted 46% of their gross profit, while health insurers and pharmacies achieved about 30%.


Sergio Marchionne’s final lap

Few people in automotive history have as impressive a legacy of wealth creation as the 65-year-old Marchionne: Henry Ford, Billy Durant, Karl Benz and Kiichiro Toyoda among them. But those titans were like the industry’s farmers — cultivating businesses from scratch and nurturing them into today’s automaking giants. Marchionne, in contrast, has been the fireman — running into the ruins of once-great companies, putting out the flames and rebuilding something better than before.

“In 2004, when you were first introduced to the auto industry, a lot of people were thinking, ‘Who the hell is this guy?’ Right? I was one of them, frankly,” Morgan Stanley analyst Adam Jonas told Marchionne during FCA’s Jan. 25 quarterly call with analysts. “We hadn’t seen anything like you. You took $2 billion, roughly, and you’ve turned it into around $72 billion, and more important than that, there are many hundreds of thousands of families across many nations that are better off because of you and your team.”

In 2009, Marchionne inherited a mess. Daimler and later Cerberus Capital had largely failed to invest in necessary product improvements or modernize the company’s industrial footprint. Morale among employees who had survived constant cost-cutting, including several rounds of layoffs, and then the bankruptcy could not have been lower. Marchionne offered the automaker’s disheartened employees a path back to potential health — one that demanded long hours, hard work, humility and sacrifice. The employees accepted the challenge. They set to work fixing many of the things that had gone so wrong with Chrysler and its products — improving quality, overhauling 16 vehicles in 19 months, banning rat-gray interiors and fixing manufacturing plants. Their level of commitment and dedication to restore the company to some semblance of health continually surprised Marchionne.


Didi Chuxing took on Uber and won. Now it’s taking on the world

With 400m registered customers in more than 400 Chinese cities, it delivers 25m rides a day, roughly twice as many as Uber and all the other global sharing apps combined. In the future, Liu imagines an even larger purpose, as Didi uses big data and machine learning to fix the many problems that snarl-up urban areas. “When you redesign the transportation system, you basically redesign the whole city,” Liu says. “You redefine how people should live.”

AI currently matches thousands of riders and drivers each minute, as part of a decision-making platform the company calls “Didi Brain”. This already predicts where riders are likely to want cars 15 minutes ahead of time, guessing right 85 per cent of the time. As it seeks out more patterns, Zhang says, the system will see forward an hour, or even a full day, using reinforcement learning, a powerful AI technique in which computers learn via experimentation, much as a child might use trial and error.

But for Didi, machine learning helps solve more basic problems, like traffic signals. “They’re sometimes manually operated every 90 seconds by someone sitting in a room,” Liu says. In the eastern city of Jinan, Didi algorithms now power “smart” traffic lights, which optimise patterns based on real-time car data, cutting congestion by ten per cent. Similar projects are under way in dozens of cities, along with plans to improve traffic lane management and bus systems.


Dyson bets on electric cars to shake up industry

Dyson has worked extensively on lightweight materials, leading several people to speculate the first vehicle may be substantially comprised of plastics rather than metals, something usually reserved for high-end supercars. This would make the cars lighter — important because of the weight of electric batteries — but also allowing for more inventive designs. When announcing the project last September, Sir James said the first car would look “quite different” to any currently on the market.

Dyson aims to lean less heavily on suppliers than traditional carmakers, partly because of a penchant for making components in house, and partly because electric cars contain substantially fewer bits than their combustion engine counterparts. The group already produces electric motors, which turn the wheels, as well as battery cells in-house, and is investing heavily in software development, an increasingly important part of modern cars.


SpaceX joins race to make web truly worldwide

If successful, however, SpaceX has said it plans to start launching its first commercial satellites next year, with a constellation of more than 11,000 circling the earth in low-earth orbit by the time the network is complete in 2024.

The satellite trial points to an impending space race that has drawn in powerful backers. Google, which once looked at developing its own satellite-based network, became one of SpaceX’s biggest backers when it led a $1bn investment round three years ago. Meanwhile, SoftBank and Richard Branson are among the backers of OneWeb, a European rival that hopes to start providing broadband internet next year.


Driverless cars: mapping the trouble ahead

“Everyone is trying to develop their own in-house HD map solution to meet their self-driving needs, and that doesn’t scale,” says Mr Wu of DeepMap. “It’s all reinventing the wheel, and that’s wasting a lot of resources. That will probably be one of the reasons to block self-driving cars from becoming a commodity.” Because companies do not share mapping data and use different standards, they must create new maps for each new city that they plan to enter. “It will delay the deployment in certain geographies,” Mr Wang says.

Willem Strijbosch, head of autonomous driving at TomTom, says the maps needed for driverless cars are different from the current map applications because they will need to “serve a safety critical function”, rather than just being used for navigation. “Another change is that you can no longer use GPS as your only means of localisation in the map,” he adds, because the global positioning system is not precise enough for self-driving cars.


Eyes in the sky: a revolution in satellite technology

Farmers can use the imagery to estimate crop yields around the world, investors are counting the number of oil storage tanks in China and estimating consumption trends, while human rights campaigners have used it to map the flight of the Rohingya population from Myanmar. On a daily basis, we can now study the shrinkage of glaciers, the expansion of cities, the deforestation of remote wildernesses and the devastation of armed conflict in intense detail.

“Seeing the whole Earth as a single entity is not new,” says Martin Rees, Britain’s astronomer royal. “But what is happening now is that we are monitoring it on a daily basis at high resolution. Satellites have enough resolution to observe every big tree in the world every day.”

Planet now has a fleet of 190 satellites in orbit, including 13 SkySat satellites. That network provides a steady feed of imagery — more than 1.3 million photographs a day — that can be combined with other data streams to create a comprehensive “space data processing platform”. The company includes feeds from the Sentinel satellites, which operate as part of the EU’s Copernicus programme, and the US Landsat 8 satellite, adding infrared and radar capability.

Over the past two years, Planet has sold its data services to hundreds of customers in about 100 different countries, including the US, UK and German governments and big companies such as Bayer, Monsanto and Wilbur-Ellis. Planet says it has strict ethical guidelines and vets its customers as best it can to ensure that sensitive images do not end up in the wrong hands.

The number

Dr. Edward Deming once said that the numbers that best define a company are two factors that do not appear on any financial statement. These factors are the value of a satisfied customer and the value of a dissatisfied customer. These factors must be multiplied by every other number in a financial statement in order to assess the prospects of the business. A high satisfaction leads to repeat purchases and referrals, growing the business; while a low satisfaction leads to ending relationships and a repulsion of potential new customers. These numbers determine everything about the future and nobody quite knows what they are.

Stocks are more similar to bonds than you think

The table demonstrates that stocks have done an admirable job diversifying negative returns in bonds over time, showing losses only in three out of the 16 different times that bonds had down years. The spread between the two averaged more than 16 percent. It should also be comforting to those who practice diversification that even when both have fallen in the same year, bonds typically don’t get crushed like stocks do and instead tend to only show minor losses.

Companies pay workers to get savvier with money

Carrie Leana, a professor of organizations and management at University of Pittsburgh, said participants reported significant declines in their financial worry and increases in both their physical and psychological health.

To tackle this, companies are using incentives to boost participation in financial-wellness programs. These typically combine financial education with customized advice delivered by mobile apps and human advisers. The goal: to teach employees basic money-management skills and remind them—via text messages, emails or one-on-one meetings—to stick to budgets, pay bills and save more for everything from emergencies to retirement.

“We know that stress is the No. 1 cause of health-related issues, and the No. 1 cause of stress is money,” said SunTrust CEO William Rogers Jr. “If we can attack financial stress, we can improve our employees’ physical well-being as well.”

Curated Insights 2018.02.04

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

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

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

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

How Amazon’s ad business could threaten Google and Facebook

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

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

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

How Apple built a chip powerhouse to threaten Qualcomm and Intel

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

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

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

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

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

AlphaZero and the curse of human knowledge

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

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


Even if you knew the cards…

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