Curated Insights 2018.10.12

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

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

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

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

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

How big can Amazon get?

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

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

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

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

What Spotify can learn from Tencent Music

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

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

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


Traffic acquisition costs

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

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

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

Shares of pet insurer Trupanion are overvalued

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

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

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

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

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


Can anyone bury BlackRock?

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

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

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

How to break up a credit ratings oligopoly

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

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


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

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

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


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

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

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


Why the Elastic IPO is so important

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

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


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

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

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

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

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

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

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

Can anyone catch America in plastics?

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

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


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

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

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

Circle of competence

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


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

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


Market timing is hard

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

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

The Decision Matrix: How to prioritize what matters

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

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

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

Risk management

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

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

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

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


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

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

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

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

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

Curated Insights 2018.07.27

 

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

Consumer startups are dead. Long live consumer startups.

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

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

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

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

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

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

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


The future of media

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

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

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

Airbnb offers investors a unique stay

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

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

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

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

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


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

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

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


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

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

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


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

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

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

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

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

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

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

 

BlackRock ready to spread its web across Europe

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

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

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

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

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

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

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

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

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

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

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

Restaurants must embrace online delivery, and fast

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

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

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

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

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

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

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

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

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

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

Why we need to update financial reporting for the digital era

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

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

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

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

A whiff of rotten eggs may augur an oil shock

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

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

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

Curated Insights 2017.12.10

The impossibility of intelligence explosion

The first issue I see with the intelligence explosion theory is a failure to recognize that intelligence is necessarily part of a broader system — a vision of intelligence as a “brain in jar” that can be made arbitrarily intelligent independently of its situation. A brain is just a piece of biological tissue, there is nothing intrinsically intelligent about it.

In particular, there is no such thing as “general” intelligence. On an abstract level, we know this for a fact via the “no free lunch” theorem — stating that no problem-solving algorithm can outperform random chance across all possible problems. If intelligence is a problem-solving algorithm, then it can only be understood with respect to a specific problem. In a more concrete way, we can observe this empirically in that all intelligent systems we know are highly specialized.

If intelligence is fundamentally linked to specific sensorimotor modalities, a specific environment, a specific upbringing, and a specific problem to solve, then you cannot hope to arbitrarily increase the intelligence of an agent merely by tuning its brain — no more than you can increase the throughput of a factory line by speeding up the conveyor belt. Intelligence expansion can only come from a co-evolution of the mind, its sensorimotor modalities, and its environment.

In Terman’s landmark “Genetic Studies of Genius”, he notes that most of his exceptionally gifted subjects would pursue occupations “as humble as those of policeman, seaman, typist and filing clerk”. There are currently about seven million people with IQs higher than 150 — better cognitive ability than 99.9% of humanity — and mostly, these are not the people you read about in the news. Of the people who have actually attempted to take over the world, hardly any seem to have had an exceptional intelligence; anecdotally, Hitler was a high-school dropout, who failed to get into the Vienna Academy of Art — twice.

People who do end up making breakthroughs on hard problems do so through a combination of circumstances, character, education, intelligence, and they make their breakthroughs through incremental improvement over the work of their predecessors. Success — expressed intelligence — is sufficient ability meeting a great problem at the right time. Most of these remarkable problem-solvers are not even that clever — their skills seem to be specialized in a given field and they typically do not display greater-than-average abilities outside of their own domain.

So, a person with an IQ of 130 is statistically far more likely to succeed in navigating the problem of life than a person with an IQ of 70 — although this is never guaranteed at the individual level — but here’s the thing: this correlation breaks down after a certain point. There is no evidence that a person with an IQ of 170 is in any way more likely to achieve a greater impact in their field than a person with an IQ of 130.

Why would the real-world utility of raw cognitive ability stall past a certain threshold? This points to a very intuitive fact: that high attainment requires sufficient cognitive ability, but that the current bottleneck to problem-solving, to expressed intelligence, is not latent cognitive ability itself. The bottleneck is our circumstances. Our environment, which determines how our intelligence manifests itself, puts a hard limit on what we can do with our brains — on how intelligent we can grow up to be, on how effectively we can leverage the intelligence that we develop, on what problems we can solve. All evidence points to the fact that our current environment, much like past environments over the previous 200,000 years of human history and prehistory, does not allow high-intelligence individuals to fully develop and utilize their cognitive potential.

And they are only able to succeed because they are standing on the shoulder of giants — their own work is but one last subroutine in a problem-solving process that spans decades and thousands of individuals. Their own individual cognitive work may not be much more significant to the whole process than the work of a single transistor on a chip.

It is civilization as a whole that will create superhuman AI, not you, nor me, nor any individual. A process involving countless humans, over timescales we can barely comprehend. A process involving far more externalized intelligence — books, computers, mathematics, science, the internet — than biological intelligence.

We don’t have to speculate about whether an “explosion” would happen the moment an intelligent system starts optimizing its own intelligence. As it happens, most systems are recursively self-improving. We’re surrounded with them. So we know exactly how such systems behave — in a variety of contexts and over a variety of timescales. You are, yourself, a recursively self-improving system: educating yourself makes you smarter, in turn allowing you to educate yourself more efficiently. Likewise, human civilization is recursively self-improving, over a much longer timescale.

Google’s AlphaZero destroys Stockfish in 100-game match

This would be akin to a robot being given access to thousands of metal bits and parts, but no knowledge of a combustion engine, then it experiments numerous times with every combination possible until it builds a Ferrari. That’s all in less time that it takes to watch the “Lord of the Rings” trilogy. The program had four hours to play itself many, many times, thereby becoming its own teacher.

“We have always assumed that chess required too much empirical knowledge for a machine to play so well from scratch, with no human knowledge added at all,” Kasparov said. “Of course I’ll be fascinated to see what we can learn about chess from AlphaZero, since that is the great promise of machine learning in general—machines figuring out rules that humans cannot detect. But obviously the implications are wonderful far beyond chess and other games. The ability of a machine to replicate and surpass centuries of human knowledge in complex closed systems is a world-changing tool.”


CVS’s $68 billion bid to bring one-stop shopping to health care

The buyout would combine the largest U.S. drugstore chain with the third-biggest health insurer. CVS also manages drug benefits plans for thousands of employers and insurers, a business that could help steer some of Aetna’s 22 million customers to CVS pharmacy counters when they fill a prescription. Already, CVS has 1,100 MinuteClinics in its pharmacies, where nurse practitioners and physician assistants provide routine care such as flu shots or wrapping sprained ankles. It’s also trying out hearing and vision centers in a handful of locations. If the merger goes through, CVS plans to build mini-health centers in many more of its 9,700 stores, turning them into places where Aetna members—and customers of rival insurers—get convenient low-level care for ailments and chronic diseases. And having a closer tie to where customers are treated could help Aetna better manage their ailments earlier, more efficiently—and less expensively.

The integration is part of a wide-ranging effort by health insurance companies and the federal government to shift care away from paying for each service and toward paying doctors and hospitals for taking better care of patients and keeping them healthier. The approach, known as value-based care, challenges the industry’s traditional reimbursement models.

CVS and Aetna say they’ll be able to reduce costs by directing some patients to lower-cost sites of care in CVS stores, keeping them out of emergency rooms and hospitals. About 70 percent of the U.S. population lives within 3 miles of a CVS location, according to David Larsen, an analyst at Leerink Partners. “This is going to be appealing to a huge number of people,” says Ingrid Lindberg, president of Kobie Marketing Inc. and a former chief customer experience officer at health insurer Cigna Corp. “There’s a large majority of people who are truly driven by ease and convenience when it comes to their care.”


This company is about to flood the U.S. with cheap HIV drugs

Laurus is one of the world’s biggest suppliers of ingredients used in anti-retrovirals, thanks to novel chemistry that delivers cheaper production costs than anyone else. Now, its chief executive officer, Satyanarayana Chava, wants to use the same strategy selling his own finished drugs in the U.S. and Europe. He predicts some generics that Laurus produces will eventually sell for 90 percent less than branded HIV drugs in the U.S., slashing expenditures for a disease that’s among the costliest for many insurers.

The patent expiries are starting this month when Bristol-Myers Squibb Co.’s Sustiva loses protection. Gilead Sciences Inc.’s Viread follows next month. Both companies didn’t respond to requests for comment.

Though Laurus doesn’t yet make the actual pills those patients take, it’s become a dominant supplier of the key ingredients that make them work. The best way to fight HIV is with a combination of different drugs, and because Viread and Sustiva form key parts of some of the most effective combinations, the inclusion of generic versions of these chemicals could bring down the cost of the whole treatment. One analysis cited by the Department of Health and Human Services found that replacing a three-medicine, branded combination with multiple pills, including a generic version of Sustiva, could save the U.S. $900 million its first year.

Laurus controls about 66 percent of the global market for efavirenz, the chemical name for Bristol-Myers Squibb’s Sustiva, and 33 percent for tenofovir, the chemical name for Gilead’s Viread, according to a report earlier this year by investment bank Jefferies Group LLC.

The hidden player spurring a wave of cheap consumer devices: Amazon

That future? We’re going to get better products for ludicrously low prices, and big brands across a range of categories — the Nests and Netgears of the world — are going to find it harder than ever to get us to shell out big money for their wares.

To hit the $20 price, Wyze licensed the camera’s hardware from a Chinese company, then created its own software. It also cut out just about every middleman, including most retailers. And it’s banking on long-run success. While Wyze is just breaking even on its first camera, its founders believe internet-connected home devices will be a growth category. They plan to establish a trusted brand with the first camera, then release a succession of products that they hope to sell in large numbers, at low prices.

…what was unique about Amazon was that its store encouraged low prices while heavily penalizing companies that made shoddy products. “It’s not a race to the bottom,” Mr. Fung said. “Sellers are forced to create better products at lower pricing, and sellers who aren’t able to do that just get weeded out.”

The classic worry about Amazon is that it puts local retailers out of business. Now another worry is that by exposing global brands to the harsh reality of low-priced competitors, it may put them out of business, too. Mr. Wingo said global brands across a variety of categories — electronics, apparel, home improvement — regularly approached his company looking for a way to compete with low-priced rivals on Amazon.

“There is this erosion of what it means to be a traditional consumer product brand,” Mr. Wingo said. “In a way, Amazon is providing all this information that replaces what you’d normally get from a brand, like reputation and trust. Amazon is becoming something like the umbrella brand, the only brand that matters.”


Proof Work aims to decentralize medical data by using the blockchain

The system, if successful, would be a big disruption to how health care data is handled today – where it’s often accessible only by the doctors and hospitals themselves, and where patients have to make special requests to have a copy of their own medical records. In the future, the goal is to allow patients to walk into a doctor’s office with all their medical records already on their phone.

This isn’t the first attempt to use technology to fix the problem with medical records; others have tried to centralize records for easier access, including Microsoft HealthVault, for example. One of the challenges getting prior systems to work was that healthcare companies aren’t necessarily interested in making it easier for patients to have access to their own medical records, says Suter. After all, the patients could go to another provider.

Pitney Bowes Parcel Shipping Index reveals 48 percent growth in parcel volume since 2014

China, a new addition to this year’s Index and by far the largest market examined, grew parcel volume by 52 percent in one year, increasing from 21 billion parcels in 2015 to 31 billion in 2016. But, even when excluding China’s prolific volumes, the Index forecasts a strong and accelerating pace of growth in parcels throughout the world. On average, the other 12 major markets studied have grown 4.3% annually since 2012 and are projected to grow 4.5% – 5.4% annually through 2021. The United States (at 13 billion) and Japan (at 9 billion) were also among the largest markets by parcel volume. In terms of investment, the United States ranked highest, spending $96 billion on parcel shipments, followed by China at $60 billion and Japan at $22 billion.

“The continued rise of ecommerce globally is keeping the parcel shipping market strong through 2021 as consumers are increasingly looking to online shopping for convenience, price and availability of products from around the world,” said Lila Snyder, executive vice president and president, Global Ecommerce, Pitney Bowes. “As consumer expectations continue to rise, shipping technology and service providers will need to help retailers and marketplaces meet those demands.”


China’s blow to recycling boosts U.S.’s $185 billion plastic bet

China is undoing decades of effort that built a massive scrap recycling industry — the cheapest way to produce plastic products for its growing economy. The country accounted for 51 percent of the world’s plastic scrap imports last year, with the biggest contribution coming from the U.S., according to the Institute of Scrap Recycling Industries, an international trade group. The China ban could shift about 2 percent of global polyethylene plastics supply from recycled to new material.

That’s because the U.S. has become the cheapest place in the world to make plastic, thanks to a fracking boom that’s created a glut of natural gas, the main feedstock for manufacturing. Taking advantage of low gas prices, chemical producers have invested an unprecedented $185 billion to build new capacity in the U.S., according to the American Chemistry Council, an industry group.

Exporting high-value resins to China instead of cheap scrap could help chip away at the U.S.’s $250 billion trade deficit with the nation. For producers, however, China’s ban on importing scrap will boost demand for new plastics by enough to nearly absorb all the new polyethylene output coming online next year in the U.S., Andrews said in the Morgan Stanley report. The effects can already be seen in China’s increased appetite for virgin polyethylene, with imports up 19 percent this year as scrap polyethylene imports dropped 11 percent, he said.

India ‘dream’ plan to cut freight times to 14 hours from 14 days

Japan, seeking to boost ties with India as a counterweight to China, is partly financing the DMIC project and holds a 26 percent stake. Indeed, Japan’s Tokyo-Osaka industrial corridor is an inspiration. NEC Corp. has invested in a joint-venture project with the Indian government that is already providing logistics support along the route.

The goal is to set up a “plug and play” environment for investors, says Jai Prakash Shivahare, managing director of the Dholera Industrial City Development. “We are looking to tie up with anchor investors so that they can also start their construction and in one-and-half-years, when our site is ready, their factories can also be ready.”

Work has now begun in four of the eight manufacturing destinations proposed in the first phase of the industrial corridor. But it has been far from smooth sailing to get to this point as red tape and budget constraints across six states and numerous sprawling ministries slowed progress, causing some to walk away altogether.


BlackRock and Vanguard are less than a decade away from managing $20 trillion

None other than Vanguard founder Jack Bogle, widely regarded as the father of the index fund, is raising the prospect that too much money is in too few hands, with BlackRock, Vanguard and State Street Corp. together owning significant stakes in the biggest U.S. companies. “That’s about 20 percent owned by this oligopoly of three,” Bogle said at a Nov. 28 appearance at the Council on Foreign Relations in New York. “It is too bad that there aren’t more people in the index-fund business.”

The argument goes like this: The number of indexes now outstrips U.S. stocks, with the eruption of passive funds driving demand for securities within these benchmarks, rather than for the broader universe of stocks and bonds. That could inflate or depress the price of these securities versus similar un-indexed assets, which may create bubbles and volatile price movements.

We’re not near a tipping point yet. Roughly 37 percent of assets in U.S.-domiciled equity funds are managed passively, up from 19 percent in 2009, according to Savita Subramanian at Bank of America Corp. By contrast, in Japan, nearly 70 percent of domestically focused equity funds are passively managed, suggesting the U.S. can stomach more indexing before market efficiency suffers. There’s even further to go if you look globally: Only 15 percent of world equity markets — including funds, separately managed accounts and holdings of individual securities — are passively managed, said Joe Brennan, global head of Vanguard’s equity index group, in an interview.


A growing number of young Americans are leaving desk jobs to farm

She joined a growing movement of highly educated, ex-urban, first-time farmers who are capitalizing on booming consumer demand for local and sustainable foods and who, experts say, could have a broad impact on the food system.

For only the second time in the last century, the number of farmers under 35 years old is increasing, according to the U.S. Department of Agriculture’s latest Census of Agriculture. Sixty-nine percent of the surveyed young farmers had college degrees — significantly higher than the general population.

Young farmers are also creating their own “food hubs,” allowing them to store, process and market food collectively, and supply grocery and restaurant chains at a price competitive with national suppliers.

Midsize farms are critical to rural economies, generating jobs, spending and tax revenue. And while they’re large enough to supply mainstream markets, they’re also small enough to respond to environmental changes and consumer demand.

Singapore’s aging ‘time bomb’ will tick louder in 2018

At this rate, seniors in Singapore’s population will make up more than double the share of the youngest residents in 2030. Tan uses a compounded annual growth rate rather than adjusting for potential policy changes or alteration of trends such as fertility rates, meaning officials could still help redraw those lines, or at least make them appear less menacing, over the next decade. With already the oldest population in the Association of Southeast Asian Nations, the Singapore of 2030 will probably look a lot like the demographics-embattled Japan of 2016.


The Louvre Abu Dhabi is getting the $450 million Da Vinci painting

The New York Times reported later Wednesday that Saudi Prince Bader bin Abdullah bin Mohammed bin Farhan al-Saud was the buyer, citing documents it reviewed. Christie’s declined to comment on the report.

The Louvre Abu Dhabi — a franchise of the Paris original — is a symbol of the oil-rich sheikhdom’s drive to boost its “soft power” credentials. To differentiate itself from neighboring Dubai, Abu Dhabi is targeting affluent tourists looking for culture and art and it has also built hotels, theme parks and malls. The organization behind the museum became one of the most aggressive buyers on the global art market over the last decade. It opened last month with more than 600 artworks for its permanent collection, including such Old Master paintings as Giovanni Bellini’s “Madonna and Child.” Da Vinci’s “La Belle Ferronnière” is on loan there from the Louvre in Paris.