Curated Insights 2019.01.11

Disney’s Bob Iger talks streaming, park plans, and learning from Kodak

In the case of Pixar, Marvel, and Lucas, none of them were for sale. We were the only ones. Us identifying them as acquisition targets and my going out and meeting with Steve Jobs and Ike Perlmutter and George Lucas one on one. Just alone. And broaching the subject and ultimately doing a deal. In looking back, particularly with Marvel and Lucas—Pixar was different—we had an ability to monetize those assets better than anyone else. If someone came along, we would have had a competitive advantage. You can argue that in the Comcast case with Fox, they’re probably the only other company out there that can monetize. Whether they monetize as well as we do, I don’t know. I don’t think they’re quite where we are.

What we looked at there was partly the result of the strategy we’re deploying, which is to be in the direct-to-consumer space in a very serious way. In order to do that, we needed a few things, and one of them, really the most important, was intellectual property. And when we looked at the Fox assets and brands—National Geographic, FX, Searchlight, the movie Avatar, the Marvel properties that they licensed, I could go on, The Simpsons—they had a lot that we could use to feed the beast that we’re taking to the market. And the board has been great at articulating this back to me. Had we not defined this strategy and gone for it, they would not have figured out how the Fox assets would have been of value to us. Because on the surface, you’re buying traditional businesses—cable channels and the like—and what do you need that for?

And then on top of that there was a global element to it that was very important to us. For instance, the Star assets in India. And they have a very successful business across Latin America. Sky was obviously attractive to us too, but it got less attractive as the price went up.

Wiedower Capital 2018 Annual Shareholder Letter: Trupanion

The vast majority of companies would take these increased efficiencies and let them drop to the bottom line. Not Trupanion. Their goal when the business is more mature in a few years is to have an adjusted operating margin of 15% (which equates to a net margin of around 5%). Once they achieve maturity, they want to then share all savings above that with their customers, basically capping their net margin at around 5%. Trupanion’s current loss ratio is ~70%, but their longer-term goal is to increase that to 80% (essentially giving 10% more value back to their customers).

To be clear, even if Trupanion does succeed with the scaled economies shared flywheel, it will not be as effective as Costco’s has been. An insurance company increasing loss ratios is a much less tangible benefit to the consumer vs a retailer decreasing prices. This is because retail prices can easily be compared at Costco vs Walmart or Amazon, whereas insurance policy prices are generally harder to compare apples-to-apples. However, I still believe this will make life harder on other pet insurers if Trupanion is slowly increasing their loss ratios on a yearly basis. That is tough to compete with. Very few companies are willing to pass up higher short-term profits every single year in the hopes that decreasing their prices will increase long-term customer loyalty.

For Healthy Paws (the #3 pet insurer, but the competitor I worry about the most) to have a meaningful effect on Trupanion’s customer acquisition strategy, they would have to hire and train a hundred salespeople all over the country and those people would have to spend years getting inroads into vets. And vets that already have Trupanion Express installed will have an even higher barrier to entry. Over 10% of vets in North America already have Express installed and that number is growing quickly (install growth was 42% in 2017 and over 50% in 2018).

Because of their customer acquisition cost, Trupanion loses money in the first year of all new pets they sign up. However, the average pet stays with Trupanion for over eight years, so that initial loss is made up over time. But because Trupanion is growing so fast, the cost of those new pets every year make the reported financials look worse than the progress of the underlying business. If customer acquisition costs are amortized over the life of a pet, the financials look much better.

This means that for every dollar spent on sales and marketing, Trupanion gets a 30-40% return on that invested capital. Very few businesses can maintain that return on capital for very long. Trupanion has been doing this for years and, given the industry penetration is just over 1%, they may be able to continue achieving this high return for many more years. Trupanion has the best unit economics of any company we own and, just as important, I believe these returns can continue because they are very defensible.

In addition to valuation, I believe the regulatory risks to Trupanion are overblown. The most touted regulatory risk is that many of Trupanion’s territory partners are not licensed to sell insurance—even though they don’t sell insurance and ideally never even interact with potential customers. There are fringe cases where this can be iffy though. For example, an unlicensed territory partner who talks to her friend about the benefits of Trupanion could potentially cross the line. Even in the scenario where regulators rule that all territory partners need to be licensed, I don’t believe the risk is large to Trupanion. From talking to insurance regulators about this, I expect a modest fine at worst.

The regulatory risk that I think is a bigger concern, but that gets discussed less often, is if veterinarians were required to get licensed. The veterinarians are the main conduit that connect pet owners to Trupanion. If veterinarians were required to get licensed, this would kill Trupanion’s current business model as very few vets would go through the effort of getting licensed. Here, it’s important to note that veterinarians who work with Trupanion do not explain the insurance specifics to their pet owner clients. The vets are allowed to recommend the concept of pet insurance broadly, and then discuss their personal experience with Trupanion, but that’s it. The vets do not get into insurance coverage details because that is when they would be required to get licensed.

Dureka Carrasquillo long Ferrari: Sohn London Conference

In 2017 the luxury car market was valued at $570bn. Estimates suggest it will grow at about 9% for the next 5 years. Ferrari sits in the category of luxury goods that is considered an ‘experience’ and that category is projected to grow at an even higher rate.

Special cars have historically been about 2% of sales but they will become a larger part of the business. She estimates that by 2022 special cars will represent 20% of revenues. These cars which are limited editions – often 500 cars – sell for more than $1m each and sometimes sell out on the day they go on sale. Gross margins on special cars are about 3x base cars. If the number of special cars is increased in the way that Carrasquillo predicts EBITDA margins for the whole group could increase from 33% to 38%.

Another hallmark of a luxury goods player is careful management of supply. Current product capacity is about 16,000 cars per year yet only 9000 are made. In comparison, Porsche sells 25,000 to 30,00 911s per year. Carrasquillo thinks that Ferrari could increase production to 16,000 cars per year and still sell them. Ferrari intends to launch 15 new models in the next 5 years – that’s a lot more than in the past. It takes about 40 months to produce and launch a new car.


Luke Newman long Rolls Royce: Sohn London Conference

At its heart Rolls Royce is a razor to razorblade business model – the razors – or the engines in this case – cost billions of dollars to design, deliver and install and come with an obligation to buy razorblades – service contracts – for the next 25 years. The gross margins on the service contracts are high between 50% to 70% but the engines are sold at a loss.

The secular trends in air travel are supportive driven by increasing wealth and emerging markets. Air passenger kilometres over the last 70 years have grown at 6% CAGR. If passenger growth continues at 4.5% and assuming planes have a 25-year life, 425 new wide body planes are required every year to keep up with demand. That’s 37 new wide-bodied planes every month. The production schedules for Boeing and Airbus for next year are slated at 34 per month creating positive pricing dynamics for all participants.

Over the last 20 years what was a 3-player market has become a duopoly. Pratt and Whitney took the rationale decision to concentrate on narrow body engines and ceded their market share to Rolls Royce. That did not come for free because Rolls Royce had to spend billions of dollars developing new engines to take the market share. The good news is that this year is the first year in which most of the revenue will come from the high margin aftermarket business. The company has reached a critical inflection point.

GE, the other member of the duopoly, has been in harvest mode, maintaining share and enjoying good aftermarket revenues. GE has lots of problems, but the engine business has not been one of them. GE’s engine margins have been consistently high.

Curated Insights 2019.01.04

The customer acquisition pricing parade

“One spectator, determined to get a better view, stands on their tiptoes. It works well initially until everyone else does the same. Then, the taxing effort of standing on your toes becomes table stakes to be able to see anything at all. Now, not only is any advantage squandered, but we’re all worse off than we were when we first started.”

“Marketing is increasingly cheap. Trust is increasingly expensive. Attracting eyeballs no longer sets you apart. Building trust among those who have their eyes on you, does. Getting people’s attention is no longer a skill. Keeping people’s attention is.”

To decrease spending and increase profitability, the holding companies of tomorrow will shift their attention from controlling supply to controlling demand — from building around industries to building around audiences.  

Re-marketing to an existing customer is significantly cheaper than trying to persuade a first time customer to buy your product — sometimes nearly 90% cheaper.

Companies who cater to the needs of passionate customers will benefit from lowered customer acquisition costs and higher lifetime value (LTV), reduced churn and increased loyalty. Once a paying customer is acquired, companies can cross-sell and up-sell them into different products, categories, and even brands. The fight to find that customer will be much easier leading to an increase in transaction volume. As they reduce friction in the payment process and increase customer loyalty, they’ll accrue data behind customer cohorts leading to a customer-centric experience.

Companies who cater to their customers and develop direct relationships with them, will own the future.

Working more magic at Disney

Walt Disney has in a sense become more Disney-like in how it earns its profits. After 20 years of being dominated by television, especially cable, the company is returning to its roots in films and theme parks. Seven years ago, for each $1 in operating profit that Disney made from its parks and studios, it generated $3 in TV. During the fiscal year ended September, parks and studios retook the lead.

The coming streaming platform will be reported to Wall Street as a separate Netflix-like division within Disney. Investors will see how much cash the unit is paying for content. New Disney, so to speak, will pay this money to Old Disney. “What I’ve discovered is, businesses in a traditional space that want to innovate and spend money to do so, they park the cost of innovation in their traditional businesses,” Iger says. “Those businesses all kind of suffer from the cost of that innovation, because it’s not typically monetized right away. You can get impatient to the point of losing interest and abandoning innovation, because you don’t have the patience to wait for it to really pay off.”

For decades, Disney was largely a moviemaker with theme parks, although television has long been part of the mix; The Mickey Mouse Club, which began on ABC in 1955, helped finance Disneyland, and the Disney Channel has been a cable mainstay since the 1980s. But in 1995, Disney surprised investors with a $19 billion acquisition of Capital Cities/ABC, gaining a prosperous TV network and a thriving ESPN. As cable spread service across the nation, and TV producers learned how to extract higher fees from cable operators for their content, the small screen became Disney’s big earner.

Iger planted the roots of Disney’s growth spurt in its traditional businesses when he rolled up major story-telling outfits that weren’t for sale. He did that by visiting their bosses one-on-one: Steve Jobs, culminating in the $7.4 billion purchase of Pixar in 2006; Isaac Perlmutter, for a $4 billion acquisition of Marvel Entertainment in 2009; and George Lucas, in a $4 billion deal for Lucasfilm in 2012. What has followed has been a film boom for the ages.

This year, Disney will again become the only studio in history to reap $7 billion in worldwide box office receipts: $4 billion internationally and $3 billion in the U.S. It also did so in 2016. And Disney makes eight to 10 films a year; some big studios make two dozen.

Box office results relate to return on invested capital the way dunking a basketball relates to winning a game: The former gets the crowd’s attention, but people with stakes care mostly about the latter. The broader film industry operates with a single-digit return, Iger says. Yet there are years when Disney’s film returns top 30%. As a result, studio operating income has multiplied more than fourfold since 2011, to nearly $3 billion during the fiscal year ended in September.

Does AI make strong tech companies stronger?

First, though you need a lot of data for machine learning, the data you use is very specific to the problem that you’re trying to solve. GE has lots of telemetry data from gas turbines, Google has lots of search data, and Amex has lots of credit card fraud data. You can’t use the turbine data as examples to spot fraudulent transactions, and you can’t use web searches to spot gas turbines that are about to fail. That is, ML is a generalizable technology – you can use it for fraud detection or face recognition – but applications that you build with it are not generalized. Each thing you build can only do one thing. This is much the same as all previous waves of automation: just as a washing machine can only wash clothes and not wash dishes or cook a meal, and a chess program cannot do your taxes, a machine learning translation system cannot recognise cats. Both the applications you build and the data sets you need are very specific to the task that you’re trying to solve (though again, this is a moving target and there is research to try to make learning more transferable across different data sets).

So: as an industrial company, do you keep your own data and build the ML systems to analyse it (or pay a contractor do do this for you)? Do you buy a finished product from a vendor that’s already trained on other people’s data? Do you co-mingle your data into that, or into the training derived from it? Does the vendor even need your data or do they already have enough? The answer will be different in different parts of your business, in different industries and for different use cases.

This takes me to a metaphor I’ve used elsewhere – we should compare machine learning to SQL. It’s an important building block that allowed new and important things, and will be part of everything. If you don’t use it and your competitors do, you will fall behind. Some people will create entirely new companies with this – part of Wal-Mart’s success came from using databases to manage inventory and logistics more efficiently. But today, if you started a retailer and said “…and we’re going to use databases”, that would not make you different or interesting – SQL became part of everything and then disappeared. The same will happen with machine learning.


One giant step for a chess-playing machine

Most unnerving was that AlphaZero seemed to express insight. It played like no computer ever has, intuitively and beautifully, with a romantic, attacking style. It played gambits and took risks. In some games it paralyzed Stockfish and toyed with it. While conducting its attack in Game 10, AlphaZero retreated its queen back into the corner of the board on its own side, far from Stockfish’s king, not normally where an attacking queen should be placed.

Yet this peculiar retreat was venomous: No matter how Stockfish replied, it was doomed. It was almost as if AlphaZero was waiting for Stockfish to realize, after billions of brutish calculations, how hopeless its position truly was, so that the beast could relax and expire peacefully, like a vanquished bull before a matador. Grandmasters had never seen anything like it. AlphaZero had the finesse of a virtuoso and the power of a machine. It was humankind’s first glimpse of an awesome new kind of intelligence.

Tellingly, AlphaZero won by thinking smarter, not faster; it examined only 60 thousand positions a second, compared to 60 million for Stockfish. It was wiser, knowing what to think about and what to ignore. By discovering the principles of chess on its own, AlphaZero developed a style of play that “reflects the truth” about the game rather than “the priorities and prejudices of programmers,” Mr. Kasparov wrote in a commentary accompanying the Science article.

What is frustrating about machine learning, however, is that the algorithms can’t articulate what they’re thinking. We don’t know why they work, so we don’t know if they can be trusted. AlphaZero gives every appearance of having discovered some important principles about chess, but it can’t share that understanding with us. Not yet, at least. As human beings, we want more than answers. We want insight. This is going to be a source of tension in our interactions with computers from now on.

Maybe eventually our lack of insight would no longer bother us. After all, AlphaInfinity could cure all our diseases, solve all our scientific problems and make all our other intellectual trains run on time. We did pretty well without much insight for the first 300,000 years or so of our existence as Homo sapiens. And we’ll have no shortage of memory: we will recall with pride the golden era of human insight, this glorious interlude, a few thousand years long, between our uncomprehending past and our incomprehensible future.


Evaluating early stage startups — The three metrics that matter

Defining “fast growth” depends on stage, but for early (Seed or Series A), growing 100% YoY is typically pretty solid. Paul Graham (PG) famously looks for 5–7% weekly growth for companies in Y Combinator, and his rationale is pretty simple: “a company that grows at 1% a week will grow 1.7x a year, whereas a company that grows at 5% a week will grow 12.6x.” When you consider the compounding effects of this growth, it means a company starting with $1,000 in revenue and growing at 1% will be at $7,900 per month four years later, whereas the company growing 5% per week will be bringing in more than $25 million per month.


The founder’s guide to understanding investors

When we dig deeper, the degree to which early-stage investing is a grand slam business is shocking. First, amongst early stage investors, the returns are disproportionately distributed. The Kauffman Foundation, an investor in many VC funds, found the top 20 VC firms (~3% of VC firms), generate 95% of all venture returns. Second, outside of the top 20 VC firms, most lose money! A study found the top 29 VC firms made a profit of $64B on $21B invested, while the rest of the VC universe lost $75B on $160B invested.

As early-stage investing operates on a power law, Paul Graham (founder of Y Combinator) mentions “You [as an investor] have to ignore the elephant in front of you, the likelihood they’ll [the startup] succeed, and focus instead on the separate and almost invisibly intangible question of whether they’ll succeed really big.” He highlights there are 10,000x variations (!) in startup investing returns, meaning top investors must have the mindset of willing to strike out in order to hit grand slams.

There needs to be room for your startup to capture a large share of this market. Elad Gil (early investor in Airbnb, Coinbase, Gusto, Instacart, Stripe), explains this means i) the market is structurally set up to support multiple winners, but ii) if the market only supports one winner and customers are currently not served well – there is an opportunity to dominate the market.

At the Series A stage, investors are mainly looking to see if PMF is achieved. This evaluation can be qualitative – Marc Andreessen (co-founder of Netscape and Andreessen Horowitz, an early investor in Facebook, Twitter, Wealthfront, Slack) notes, on the inside, “you can always feel product/market fit when it’s happening. The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can. Reporters are calling…”

When investors are evaluating for PMF, Rachleff notes that the best test is to see if the product is growing exponentially with no marketing, meaning the product is so good it grows through word of mouth. Top investors often don’t want to see marketing spend because it shows care for vanity metrics (things that don’t matter) rather than building an amazing product that people engage with (which does matter).

Not all buzzwords will fulfill their potential and result in a disruptive technology shift though. As a founder, you can reduce this risk by avoid starting a startup on that shift until the technology adoption is growing quickly and reaches a multi-hour per day level of usage. Sam Altman expands, “It’s very hard to differentiate between fake trends and real trends…If you think hard and you really pay attention, sometimes you can. The metric I use to differentiate between a real trend and a fake trend is similar to loving a product. It’s when there is a new platform that people are using many hours every day.”

To believe the startup can fulfill grand slam potential, investors want to see the startup has verified their assumptions on how users find the product in a repeatable and scalable manner. This is also called a go-to-market strategy (GTM).

Bill Gurley (major early investor in Uber, Stitch Fix, Zillow, etc.) called a unique GTM the most under-appreciated part about startups. It’s not about who did it first, but who did it right. Gurley looks to see if the startup has two things: (1) An interesting way to get into the market; (2) A way to establish themselves once in the market. The word ‘unique’ is important here. Replicating existing GTM strategies is often too costly because incumbents have already dried up the channel(s) to market and sell to customers. As a founder, you need to find a unique GTM that is repeatable and scalable. The good news here is that if you succeed, you’ll be able to keep out competitors by saturating the new channels.

Andy Rachleff has a second perspective on how startups can avoid competition. With his adaptation to Clayton Christensen’s (Harvard Business School Professor) disruption theory, startups can compete with reduced competition in either two ways. They can compete via new-market disruption – targeting a new set of users and competing on different characteristics (e.g. instead of price, focus on experience) than competitors, or they can compete via low-end disruption – targeting the same set of users as incumbents, but offering a greatly reduced product at a lower price point.

Along with the above quote, Bill Gurley tests if executives at the startup have a notion of insane curiosity – constantly learning new ways to win. To evaluate this, he asks questions on what information (e.g. books, podcasts) executives learn from, how they engage with it, and then probes if they are trying to use that information to majorly improve themselves or their business.

Curious folks tinker. Obsessively curious folks solve the hardest problems that require endless tinkering. If you are obsessively curious and fail with your original plan, odds are you will use your learnings and pivot into a big market that loves their product.

If a founder is obsessively curious, they can navigate the idea maze. By running a founder through the idea maze, investors evaluate if the founder understands all permutations of their idea, why their plan is superior to all other competitors, and which turns to lead to treasure versus which ones lead to certain death. It’s important for a founder to thoroughly know their idea maze, it can save years by not going down the wrong path, in addition to convincing investors you know can be a grand slam.

Rating citizens – can China’s social credit system fix its trust deficit?

In some Chinese cities, if you have wilfully defaulted on paying your debts, callers to your mobile phone will hear this message instead of the usual ringback tone: “This is a friendly reminder from the people’s court of XX city. The person you have just called has been declared a trust-breaker subject to enforcement by the court …”

Given that 80 per cent of respondents in a 2018 opinion poll conducted across China have approved of the social credit system, it seems that most Chinese, for now, do not consider the drastic surveillance scheme a violation of their privacy. Instead, most see the merit of the system in the perks they may enjoy and its potential in fostering trustworthiness in society.

However, the feasibility of this is highly questionable since the government is simultaneously the enforcer, the appraiser and the appraisee. For instance, many local governments in China have often failed to repay debt ranging from a few thousand to tens of million yuan, including loans, payment to contractors, and compensation for seized land. Since local governments are the ones that assess trustworthiness and mete out punishment, will they themselves be subject to the same penalties as other defaulters?

In this county, slandering others online will take 100 points off your social credit rating, while manufacturing and selling fake products will set you back by merely 35 points. Someone who may be rightfully seeking redress by occupying government offices may be slapped with a 50-point deduction, the same penalty as someone who has given or received bribes.

Curated Insights 2018.11.23

No more “struggle porn”

I call this “struggle porn”: a masochistic obsession with pushing yourself harder, listening to people tell you to work harder, and broadcasting how hard you’re working.

Struggle porn has normalized sustained failure. It’s made it acceptable to fly to Bali and burn through your life savings trying to launch an Amazon dropshipping business. Made it reasonable to keep living on your parents money for years after graduation while you try to become #instafamous. Made LinkedIn into a depressingly hilarious circlejerk for people who look way too excited to be having their headshot taken.

Working hard is great, but struggle porn has a dangerous side effect: not quitting. When you believe the normal state of affairs is to feel like you’re struggling to make progress, you’ll be less likely to quit something that isn’t going anywhere.

Rule #1 of #StrugglePorn: if someone is bragging about how hard they’re working, you can be sure their business is failing. I don’t know anyone running a multi-million dollar business who follows struggle pornographers like GaryVee. They don’t need the feel-good reassurance that beating their head against the wall is worthwhile. They’re making money, not LinkedIn posts. They’re busy, not struggle busy.


How software is helping big companies dominate

Economies of scale are certainly part of the answer. Software is expensive to build but relatively cheap to distribute; larger companies are better able to afford the up-front expense. But these “supply-side economies of scale” can’t be the only answer or else vendors, who can achieve large economies of scale by selling to the majority of players in the market, would dominate. Network effects, or “demand-side economies of scale,” are another likely culprit. But the fact that the link between software and industry concentration is pervasive outside of the tech industry — where companies are less likely to be harnessing billions of users — suggests network effects are only part of the story.

Research suggests that the benefits of information technology depend in part on management. Well-managed firms get more from their IT investments, and big firms tend to be better managed. There are other “intangible” assets that differentiate leading firms, and which can be difficult or costly to replicate. A senior executive who has worked at a series of leading enterprise software firms recently told one of us (Walter) that a company’s ability to get more from an average developer depended on successfully setting up “the software to make software” — the tools, workflows, and defaults that allow a programmer to plug in to the company’s production system without having to learn an endless number of new skills.

Patents and copyright also make it harder for software innovations to spread to other companies, as do noncompete agreements that keep employees from easily switching jobs. But one of the biggest barriers to diffusion — and therefore one of the biggest sources of competitive advantage for the firms that excel at software — comes down to how companies are organized.

As Dixon, the VC, clearly recognized, these architectural innovations can create openings for startups. “Before [Lyft and Uber] were started, there were multiple startups that tried to build software that would make the taxi and limo industry more efficient,” Dixon has noted. If Uber had merely created software for dispatching taxis, incumbents would have been well positioned to adopt it, according to Henderson’s theory. One “component” of the service would have been changed by technology (dispatching) but not the entire architecture of the service. But ridesharing startups like Uber and Lyft didn’t didn’t just make taxis more efficient; they fundamentally changed the way the different pieces of the system fit together.

Lakhani’s answer is that Apple had the right architecture to bring phones into the internet age. Apple and Nokia both had plenty of the intangible assets necessary to excel in the smartphone business, including software developers, hardware engineers, designers. But Apple’s structure and culture were already based around the combination of hardware and a software ecosystem to which third parties contributed. It already had experience building hardware, operating systems, and software development kits from its PC business. It had built a software platform to deliver content to mobile devices in the form of iTunes. Steve Jobs initially resisted letting developers build apps for the iPhone. But when he eventually gave in, the app store became the iPhone’s key advantage. And Apple was able to manage it because of its existing “architecture.” Like any theory, architectural innovation can’t explain everything. If experience building operating systems and SDKs were so key, why didn’t Microsoft invent the winning smartphone? Apple’s particular acumen in product design clearly mattered, too. But architectural innovation helps explain why certain capabilities are so tough to replicate.

There is some good news: research suggests that cloud computing is helping smaller, newer firms to compete. Also, some firms are unbundling their advanced capabilities. For example, Amazon now offers complete fulfillment services including two-day delivery to sellers, large and small, on its Marketplace. It may be that Carr was right in principle but just had the timing wrong. But we wouldn’t bet on it. Some aspects of software will be democratized, including perhaps some areas where companies now derive competitive advantage. But other opportunities will arise for companies to use software to their advantage. One in particular stands out: even when machine learning software is freely available, the datasets to make it valuable often remain proprietary, as do the models companies create based on them. Policy may be able to help level that playing field. But companies that don’t invest in software and data capabilities risk being left behind.

Disney is spending more on theme parks than it did on Pixar, Marvel and Lucasfilm combined

Disney faces an enviable challenge: Even with steady price increases for peak periods — single-day peak tickets at Disneyland in California now run $135 — visitor interest often exceeds capacity at some properties. “You can only let so many people in a park before you start to impede on satisfaction level,” Mr. Chapek said.

So Disney’s expansion plan is more ambitious than building a “Black Panther” roller coaster here or introducing an “Incredibles” character there. The goal is transformation — adding significant capacity to Disney’s most popular parks (Disneyland, Tokyo DisneySea) and giving others major upgrades (Epcot, Disney Studios Park at Disneyland Paris) to help attract visitors more evenly throughout the empire.

In terms of attracting crowds and creating excitement, nothing quite compares to the “Star Wars” franchise. In 2019, Disney World and Disneyland will open matching 14-acre “lands” called Star Wars: Galaxy’s Edge. On one lavish attraction, guests will board an Imperial Star Destroyer, where roughly 50 animatronic stormtroopers await in formation. On another, guests will be able to pilot an interactive Millennium Falcon.

Even so, Ms. Reif said she was pleased that Disney was spending so heavily on its parks. “It’s the highest return on investment that Disney has,” she said.

Disney Cruise Line will also nearly double in size by 2023. Disney has ordered three new ships costing an analyst-estimated $1.25 billion apiece. It is buying 746 acres on a Bahamian island to build a second Caribbean port. (Disney already has one private island port.)

Rocket Lab’s modest launch is giant leap for small rocket business

Advances in technology and computer chips have enabled smaller satellites to perform the same tasks as their predecessors. And constellations of hundreds or thousands of small satellites, orbiting at lower altitudes that are easier to reach, can mimic the capabilities once possible only from a fixed geosynchronous position.

A Falcon Heavy can lift a payload 300 times heavier than a Rocket Lab Electron, but it costs $90 million compared to the Electron’s $5 million. Whereas SpaceX’s standard Falcon 9 rocket has no shortage of customers, the Heavy has only announced a half-dozen customers for the years to come.


Self-driving cars will be for sex, scientists say

“One of the starting points was that AVs will provide new forms of competition for hotels and restaurants. People will be sleeping in their vehicles, which has implications for roadside hotels. And people may be eating in vehicles that function as restaurant pods,” says Scott Cohen, deputy director of research of the School of Hospitality and Tourism Management at the University of Surrey in the U.K., who led the study. “That led us to think, besides sleeping, what other things will people do in cars when free from the task of driving? And you can see that in the long association of automobiles and sex that’s represented in just about every coming-of-age movie. It’s not a big leap.”

Of the many conclusions the paper drew about the way AVs will reshape urban tourism, perhaps the most surprising was that they’ll also revolutionize red light districts, putting prostitution on wheels. In Amsterdam, the industry (which is far from the regulated sexual utopia it’s often purported to be) was an $800 million business in 2011.

Is there a new debt crisis on the horizon?

Historically, the cycle of interest rate hikes by the Federal Reserve has been a key factor in the pricing and volatility of relatively risky and illiquid assets, such as fixed income securities issued and traded in emerging markets. If anything, recent turmoil in the global debt, equity and currency markets once again questions the viability and sustainability of the economic growth in some emerging economies and emerging financial markets.

If history can be a useful benchmark, three types of risks may emerge in emerging economies in response to interest rate hikes: 1. Capital flight; 2. Asset price fluctuation; 3. Currency devaluation.

Three charts that explain boom in Southeast Asia’s net economy

The region’s ride-hailing market will expand to about $7.7 billion in 2018 and is expected to reach $28 billion by 2025, underscoring the ambition of Go-Jek and Grab to become Southeast Asia’s super apps. Google and Temasek began including online food delivery in this category for the first time this year, given the growing importance of that business.

Online travel is the largest and most established among the four sectors of the internet economy, accounting for about $30 billion in bookings in 2018. About 41 percent of all travel bookings made in Southeast Asia were completed online, up from 34 percent in 2015. By 2025, 57 percent of the bookings will be made online when the market is projected to reach $78 billion.

Online shopping has been the fastest growing sector of the internet economy, reaching $23 billion in 2018. It’s expected to exceed $100 billion by 2025.

Box CEO Aaron Levie thinks big companies are responding to disruption the wrong way

But the root of where that innovation comes from, whether it’s Netflix, Amazon, Lyft, or Airbnb, is that these businesses are run completely differently than the incumbents. A lot of incumbents attempt to either buy, acquire, or partner with those disrupters, but that’s not going to get to the root of actually solving the problem over the long run, which is that your company has to fundamentally run in a different way in the digital age.

That’s the fundamental difference between how most people are responding to disruption and how you realistically need to in the digital age. Yes, the business model is important. Yes, the consumer experience is incredibly important. But the sustainable way to make sure you’re always able to keep up with that is by looking at your organization and your operations. That’s the thing that most companies tend to miss.


Why it’s easier to make decisions for someone else

We should also work to distance ourselves from our own problems by adopting a fly-on-the-wall perspective. In this mindset, we can act as our own advisors—indeed, it may even be effective to refer to yourself in the third-person when considering an important decision as though you’re addressing someone else. Instead of asking yourself, “what should I do?” ask yourself “what should you do?”.

Another distancing technique is to pretend that your decision is someone else’s and visualize it from his or her perspective. This can be very easy when thinking of famous exemplars, such as how Steve Jobs would make your decision. By imagining how someone else would tackle your problem, people may unwittingly help themselves.

Perhaps the easiest solution is to let others make our decisions for us. By outsourcing our choices, we can take advantage of a growing market of firms and apps that make it increasingly easier for people to “pitch” their decisions to others. For example, people can have their clothes, food, books, or home decor options chosen for them by others.

The unfair advantage of discomfort

The most uncrowded path to profound wealth is often subtle improvements in an existing industry so beautifully boring as to not attract attention from those attempting to sharpen a unicorn horn instead.

Curated Insights 2018.11.16

The Experience Economy

What makes this possible is the paradigm shift I just described: consumers are always connected, which means reaching them is dramatically cheaper than it used to be. Even seemingly basic channels like email are very effective at driving surveys that show exactly how consumers are feeling immediately after interacting with a company or buying their product.

This gives an entirely new level of insight to management: while ERP showed what was happening in the main office, and CRM what was happening in offices all over the world, experience management promises the ability to understand what is happening with customers directly. It is a perfect example of business using new technology and paradigms to their advantage.

To win in the experience economy there are two pieces to the puzzle. SAP has the first one: operational data, or what we call O-data, from the systems that run companies. Our applications portfolio is end-to-end, from demand chain to supply chain. The second piece of the puzzle is owned by Qualtrics. Experience data, or, X-data. This is actual feedback in real-time from actual people. How they’re engaging with a company’s brand. Are they satisfied with the customer experience that was offered. Is the product doing what they expected? What do they feel about the direction of their employer?

Think of it this way: the O-data tells you what happened, the X-data tells you why it happened. At present, there is not technology company that brings these two worlds together. In particular, this exposes the structural weaknesses of CRM offerings, which are still back-office focused. Experience management is about helping every person outside of companies influence every person inside a company. So SAP and Qualtrics will do just that: the strategic value of this announcement is rivaled only by the business value.

Inside John Malone’s world

“Malone has long been focused on economic return,” says Vijay Jayant, an analyst with Evercore ISI. “He’s not an empire builder for the sake of owning assets. His strategy has worked out well for the people sitting on the same side of the table as him—the shareholders in his companies.”

Warren Buffett is often a point of comparison. Among the major differences is that Malone favors creating pure-play companies, while Buffett keeps everything under one roof at Berkshire Hathaway. Malone is comfortable with financial leverage, while Buffett shuns it. “Our businesses are rationally levered with cheap money,” Malone says. “It creates a higher return on equity for our investors. There’s no reason to think the leopard will change its spots.”

Here’s Malone’s take: “We’re not out there competing to buy Red Hat for $35 billion, but we have always been an opportunistic company. We try to position ourselves so that we can take advantage of opportunities through timely investments, good management, and synergies with our existing businesses.”

His method of control through supervoting stock is ingenious. He leverages relatively small economic stakes in Liberty companies—all fall below 10%—with a total value of about $5 billion into an influential voice or effective control of virtually all of them through ownership of supervoting stock. The beauty of Malone’s approach is illustrated by Liberty Broadband, which holds a 20.6% stake in Charter. Malone’s stake in Liberty Broadband of less than 4%, worth about $500 million, gives him a strong voice at Charter—a company with a market value of $75 billion—and effective veto power over important strategic decisions.

Why technology favors tyranny

Even if some societies remain ostensibly democratic, the increasing efficiency of algorithms will still shift more and more authority from individual humans to networked machines. We might willingly give up more and more authority over our lives because we will learn from experience to trust the algorithms more than our own feelings, eventually losing our ability to make many decisions for ourselves. Just think of the way that, within a mere two decades, billions of people have come to entrust Google’s search algorithm with one of the most important tasks of all: finding relevant and trustworthy information. As we rely more on Google for answers, our ability to locate information independently diminishes. Already today, “truth” is defined by the top results of a Google search. This process has likewise affected our physical abilities, such as navigating space. People ask Google not just to find information but also to guide them around. Self-driving cars and AI physicians would represent further erosion: While these innovations would put truckers and human doctors out of work, their larger import lies in the continuing transfer of authority and responsibility to machines.

Lethal bacteria help power kidney drug to beat 1-in-1,000 odds

Doctors believe they’ve found an answer for patients like Romero in a protein that is produced by lethal bacteria. The protein, which temporarily wipes out antibodies, was crafted into an experimental drug called imlifidase to give donated organs a fighting chance against the immune system’s defenses. Developer Hansa Medical AB says imlifidase could make transplants possible for about 35,000 U.S. patients who currently have poor odds, and increase matches for others.

Trends & time lapses

The most common age in the U.S. right now is 27. In fact, by 2020, the 10 most common ages in the U.S. will all be 35 and under. A wave of young people will be saving, investing, and buying houses in the coming years. This fits with my theory that baby boomers will not destroy the stock market as they retire en masse because millennials actually outnumber them now.

The housing market will always have its ups and downs but based purely on this demographic data my inclination would be to conclude real estate across the country will continue to rise in the coming decades as millennials begin settling down and starting families. That will put some massive pressure on the housing market where supply is relatively constrained following the real estate boom and bust of the 2000s.

The relative stability of the United States as the largest economy in the world is impressive. People have been calling for a downfall of the American empire for some time now but the U.S. has a lot of built-in advantages — a diversified, dynamic economy, a vibrant technology industry, a better demographic profile than the rest of the developed world, diversity and immigration (people still want to come live here), and our increasing role as a big player in the energy space to name a few.

When things get wild

There are three legal investment strategies: You can be smarter than others. You can be luckier than others. Or you can be more patient than others. Know your edge and how hard it is to maintain.

If investing were all about math, mathematicians would be rich. If it were all about history, historians would be rich. If it were all about economics, economists would be rich. If it were all about psychology, psychologists would be rich. In reality it’s a mix of many disciplines, but some of the brightest people specialize in one topic and can’t see the world through another lens.

Your lifetime results as an investor will be mostly determined by what you do during wild times.

How this all happened

People measure their well being against their peers. And for most of the 1945-1980 period, people had a lot of what looked like peers to compare themselves to. Many people – most people – lived lives that were either equal or at least fathomable to those around them. The idea that people’s lives equalized as much as their incomes is an important point of this story we’ll come back to.

Quantitative easing both prevented economic collapse and boosted asset prices, a boon for those who owned them – mostly rich people. The Fed backstopped corporate debt in 2008. That helped those who owned their debt – mostly rich people.

Tax cuts over the last 20 years have predominantly gone to those with higher incomes. People with higher incomes send their kids to the best colleges. Those kids can go on to earn higher incomes and invest in corporate debt that will be backstopped by the Fed, own stocks that will be supported by various government policies, and so on. Economist Bhashkar Mazumder has shown that incomes among brothers are more correlated than height or weight. If you are rich and tall, your brother is more likely to also be rich than he is tall.

None of these things are problems in and of themselves, which is why they stay in place. But they’re symptomatic of the bigger thing that’s happened since the early 1980s: The economy works better for some people than others. Success isn’t as meritocratic as it used to be and, when success is granted, is rewarded with higher gains than in previous eras.

How do you help a grieving friend?

Cheering people up, telling them to be strong and persevere, helping them move on…it doesn’t actually work. It’s kind of a puzzle. It seems counterintuitive, but the way to help someone feel better is to let them be in pain.

Grief… happens upon you, it’s bigger than you. There is a humility that you have to step into, where you surrender to being moved through the landscape of grief by grief itself. And it has its own timeframe, it has its own itinerary with you, it has its own power over you, and it will come when it comes. And when it comes, it’s a bow-down. It’s a carve-out. And it comes when it wants to, and it carves you out — it comes in the middle of the night, comes in the middle of the day, comes in the middle of a meeting, comes in the middle of a meal. It arrives — it’s this tremendously forceful arrival and it cannot be resisted without you suffering more… The posture that you take is you hit your knees in absolute humility and you let it rock you until it is done with you. And it will be done with you, eventually. And when it is done, it will leave. But to stiffen, to resist, and to fight it is to hurt yourself.

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 2018.08.31

What will always be true

Think about how profound this is. One of the shortest lived mammals and one of the longest lived both have the same expected number of heart beats at birth. The term for differently sized systems displaying similar behavior is known as scale invariance and can be applied to non-biological systems as well.

As the number of employees increases, company revenue increases slightly exponentially/superlinearly. To be exact, every time the number of employees doubles (a 100% increase), revenue goes up by 112% (more than double). This corresponds to the slope of the line above at 1.12 (on a log-log scale). Note that this does not imply causality between these two metrics, but that, in a successful business, they tend to move together in some organic fashion.

For example, Netflix prides itself on being “lean”, Amazon hires thousands of warehouse workers, and Apple has a large retail presence, yet they all seem to adhere to some natural law related to company size and revenue as seen by their similar slopes. I found the same thing when comparing the number of employees to total assets as well, except the scaling exponent was slightly higher at 1.25:

Even if we cured cancer, we only add 3 years to life expectancy. Of course this is still a noble goal because it would prevent so much pain for so many people, but it doesn’t change the fact that life leads to death. It doesn’t change what will always be true. So take your 2.2 billion heart beats and make them count. They are the only ones you will ever get.

How TripAdvisor changed travel

Over its two decades in business, TripAdvisor has turned an initial investment of $3m into a$7bn business by figuring out how to provide a service that no other tech company has quite mastered: constantly updated information about every imaginable element of travel, courtesy of an ever-growing army of contributors who provide their services for free. Browsing through TripAdvisor’s 660m reviews is a study in extremes.

Researchers studying Yelp, one of TripAdvisor’s main competitors, found that a one-star increase meant a 5-9% increase in revenue. Before TripAdvisor, the customer was only nominally king. After, he became a veritable tyrant, with the power to make or break lives.

As the so-called “reputation economy” has grown, so too has a shadow industry of fake reviews, which can be bought, sold and traded online. For TripAdvisor, this trend amounts to an existential threat. Its business depends on having real consumers post real reviews. Without that, says Dina Mayzlin, a professor of marketing at the University of Southern California, “the whole thing falls apart”. And there have been moments, over the past several years, when it looked like things were falling apart. One of the most dangerous things about the rise of fake reviews is that they have also endangered genuine ones – as companies like TripAdvisor raced to eliminate fraudulent posts from their sites, they ended up taking down some truthful ones, too. And given that user reviews can go beyond complaints about bad service and peeling wallpaper, to much more serious claims about fraud, theft and sexual assault, their removal becomes a grave problem.

By 2004, TripAdvisor had 5million unique monthly visitors. That year, Kaufer sold TripAdvisor to InterActiveCorp (IAC), the parent company of the online travel company Expedia, for $210m in cash, but stayed on as CEO. For the next few years, TripAdvisor continued to grow, hiring more than 400 new employees around the world, from New Jersey to New Delhi. By 2008, it had 26 million monthly unique visitors and a yearly profit of $129m; by 2010, it was the largest travel site in the world. To cement its dominance, TripAdvisor began buying up smaller companies that focused on particular elements of travel. Today, it owns 28 separate companies that together encompass every imaginable element of the travel experience – not just where to stay and what to do, but also what to bring, how to get there, when to go, and whom you might meet along the way. Faced with such competition, traditional guidebook companies have struggled to keep up. In 2016, Fodor’s, one of the most established American travel guide companies, was bought by a company called Internet Brands.

By 2011, TripAdvisor was drawing 50 million monthly visitors, and its parent company, IAC, decided that the time had come to spin it out as a separate, publicly traded entity. Its IPO was valued at $4bn, but in December, on the first day of trading, shares fell. TripAdvisor was in new and uncertain territory, and no one knew how the company would fare on its own.

Even so, TripAdvisor is still worth only half of what it was in June 2014, and its shares dropped again in August after it missed its revenue forecast. Booking.com and Expedia, which together accounted for 46% of TripAdvisor’s annual revenue last year, largely due to marketing deals, cut back on their advertising spending. Where Maffei saw positive results, the travel industry news site Skift saw warning signs. TripAdvisor had grown by only 2% in the second quarter of 2018, it pointed out, using the words “anaemic” and “sluggish” to describe its situation. Over time, TripAdvisor has grown so large that it has become difficult to explain what it is, exactly: it’s not quite a social network, though it encourages users to “like” and comment on each other’s posts; nor is it a news site, though its business is staked on aggregating legitimate sources to provide an up-to-date portrait of the world; nor is it simply an online marketplace like its competitors Expedia.com and Booking.com. When TripAdvisor first started, consumer reviews were a new and exciting thing; now they are everywhere.

How Hollywood is racing to catch up with Netflix

“The modern media company must develop extensive direct-to-consumer relationships,” AT&T chairman-CEO Randall Stephenson told investors last month. “We think pure wholesale business models for media companies will be really tough to sustain over time.”

“The single worst thing Disney could do is launch a DTC product that consumers find underwhelming,” analyst Todd Juenger of Bernstein Research wrote this month. “We struggle to see how Disney can simultaneously make this [sustained] investment while also de-leveraging, even in a stable macro environment. We fear they will either underinvest in the DTC product, or fail to delever.”

Tucows: High reinvestment rate to drive cash flow growth

“First, and probably most importantly, all of our business lines are significantly recession proof. Relatively speaking, low price items, whether they are domain names or mobile phone service or home Internet, they are core needs, things that people cannot do without. They are not luxuries. They are, in the context of today’s world, necessities. And so we believe our business to be relatively recession-proof.”

“When looking at the Ting Internet pipeline, there are a few things that I want to reiterate up front. First, we are not cash constrained. We are not opportunity constrained. We are resource constrained. There is plenty of opportunity out there.” – TCX CEO August 21, 2018


Fiat Chrysler’s cheapskate strategy for the future of driving

The role of supplier to a bleeding-edge innovator has its perks. Fiat Chrysler is currently in talks with Waymo to license the software it would need to sell full self-driving cars to retail customers. Waymo CEO John Krafcik has said he envisions sharing profits from the robotaxi business with automaker partners in the future. “We’re not disrupting this industry—we are enabling this industry,” Krafcik told Bloomberg in an interview last month.

There are also partnerships with BMW AG and auto supplier Aptiv Plc to bring limited autonomous features, such as automated steering and lane changes, to Fiat Chrysler’s Jeep, Ram, Maserati and Alfa Romeo brands starting in 2019. In that way, without paying billions for research, Fiat Chrysler may end up with access to much of the same technology as big-spending leaders in the field.

More than money, Berkshire’s Todd Combs coming on Paytm board is the best outcome: Vijay Shekhar Sharma

I will say something which in counterintuitive here; in India, distribution is king over data. I think the distribution of Paytm, the reach of Paytm is the reason of the network effect that creates its value, not necessarily the outcome of data which we have not started using yet. I could say that different verticals of our business will use it differently versus the plan that we have in terms of our distribution. Our plan is to distribute it across every nook and corner and get a larger number of consumers. That is the first success that we will have and when we build on top of it as the next set of things.

The massive popularity of esports, in charts

In terms of viewership, the big esports events post even more impressive numbers. The 2017 League of Legends world championship, held in Beijing, drew a peak of over 106 million viewers, over 98 percent of whom watched from within China, according to industry analyst Esports Charts. That’s roughly on par with the audience for the 2018 Super Bowl.

Newzoo estimates that by 2021 esports will be a $1.7 billion industry worldwide. A 2018 Washington Post-University of Massachusetts Lowell poll found, for instance, that 58 percent of 14- to 21-year-olds said they watched live or recorded video of people playing competitive video games, with a similar percentage reporting that they played such games themselves. Among adults overall, just 16 percent said they watched competitive video gaming.

The business of insuring intangible risks is still in its infancy

“Today the most valuable assets are more likely to be stored in the cloud than in a warehouse,” says Inga Beale, chief executive of Lloyd’s of London.

Intangible assets can be hard to define, let alone translate into dollars (under international accounting standards they are defined as “identifiable non-monetary asset[s] without physical substance”). Yet their growth has been undeniable. In 2015, estimates Ocean Tomo, a merchant bank, they accounted for 84% of the value of S&P 500 firms, up from just 17% in 1975. This does not merely reflect the rise of technology giants built on algorithms; manufacturers have evolved too, selling services alongside jet engines and power drills, and crunching data collected by smart sensors.

As the importance of intangibles has grown, so has companies’ need to protect themselves against “intangible risks” of two types: damage to intangible assets (eg, reputational harm caused by a tweet or computer hack); or posed by them (say, physical damage or theft resulting from a cyberattack). However, insurance against such risks has lagged behind their rise. “The shift is tremendous and the exposure huge,” says Christian Reber of the Boston Consulting Group, “but the insurance industry is only at the early stage of finding solutions to close the gap.”

The biggest antitrust story you’ve never heard

Since 1970, the share of the American stock market owned by large investment firms has grown from 7% to 70%. Collectively, the three biggest private funds — BlackRock, Vanguard, and State Street — own more than any other single shareholder in 40% of the public companies in the U.S. That means they are often the most influential shareholders of companies that are supposed to be in competition with each other. Such “horizontal shareholding,” as it’s called, may erode competition, boost consumer prices, and possibly violate long-standing antitrust laws.

Respect the predictive power of an inverted yield curve

The silver lining in prior yield curve inversions is a recession did not occur immediately. On average it was 19 months before the onset of a recession. Additionally, the average return for the S&P 500 Index from the date of the inversion to the recession was 12.7%. For investors then, one need not panic at the first instance of an inversion; however, thought should be given to one’s portfolio allocations and make any necessary adjustments during the ensuing months. In short, respect should be given to the potential economic impact of a yield curve inversion.

Curated Insights 2018.08.10

Climbing the wall of worry: Disruptive innovation could add fuel to this bull market

This explanation of the flattening yield curve seemingly suggests that “this time is different,” but this time is not different in the context of disruptive innovation. During the 50 years ended 1929, the last time that three or more general purpose technology platforms were evolving simultaneously, the yield curve was inverted more than half of the time.1 The disruptive innovations of that time – the internal combustion engine, telephone, and electricity – stimulated rapid real growth at low rates of inflation. Through booms and busts in an era without the Federal Reserve and with minimal government intervention, US real GDP growth averaged 3.7% and inflation 1.1%, while short rates averaged roughly 4.8% and long rates roughly 3.8%.2 The yield curve was inverted. So, this time is not different, but investors do have to extend their time horizons to understand the impact of profound technological breakthroughs on the economy.

They all fall down

$1 invested in Disney in 1970 is now worth $197. $1 invested in the S&P 500 is worth $125, for comparison. The 19,500% return in Disney had plenty of bumps in the road. The stock lost 10% on a single day 11 times, including a 29% loss on October 19, 1987. Disney gained 11.5% for 48 years. But of course, there is a huge difference between 11.5% for 48 years and 11.5% every year for 48 years.

These returns were earned only by those able to withstand a massive amount of pain. Disney experienced 13 separate bear markets over the last 48 years, including an 86% crash during the 1973-74 bear market. The S&P 500 experienced just four over the same time.

Nobody could have known in real-time what the future held for this company, or whether its best days were behind it, but these would have been very real questions during every decline along the way. Disney hit an all-time high in January 1973, and wouldn’t see those levels again until 1986. It made a high in April 2000 and then didn’t get back there until February 2011.

Spotify’s playlist for global domination

This has been Ek’s plan all along: to get the music industry so dependent on Spotify that even the doubters can’t live without it. “We need this company to be robust,” Borchetta says of Spotify. “It’s important to the ecosystem of the whole business that they are successful.”

The Spotify team realized that they needed a mobile product that could be accessed by everyone, not just paying subscribers. And they needed it quickly. They had already been negotiating with labels about licensing rights for a free mobile version, but the deals weren’t done. Nor were engineers ready with a product. The sudden crisis sparked company-wide urgency. When the licensing deals were finally signed, in December 2013, “we literally just pushed the button on the same day to get it out there,” says Soderstrom of the new app. There was no time for rigorous testing. “If it had taken another six months, it might have been too late to recover.” The strategy worked: At the end of 2013, Spotify had 36 million users and 8 million paying subscribers; by January 2015, it announced 60 million and 15 million, respectively. Forty-two percent of time spent on Spotify was now via phones and 10% on tablets, the first time mobile listening surpassed desktop.

The new free tier has been a top priority for more than a year. It reflects how important it is for the company to keep acquiring new customers (and turn them into paying ones), but it also has its own commercial element. “Billions of people listen to radio, and most of that today isn’t monetized very efficiently,” Ek says as we chat on the couch in his Stockholm office. “Commercial radio, that’s conservatively a $50 billion industry globally. The U.S. radio industry is $17 billion, close to the size of the whole global recorded music industry, which is $23 billion. And what do people listen to? Primarily music.” Ninety percent of Spotify’s current revenues come from subscriptions, but if the free product expands, so can Spotify’s radiolike advertising business. As Ek notes, with typical understatement, “We still have a lot of room to grow.”

Ek didn’t see the value at first—”Oh, this is going to be a disaster,” he recalls thinking about one playlist innovation—but playlisting did more than increase Spotify’s consumer appeal. It turned Spotify into a user’s personal DJ. The company told investors in its prospectus, filed last February, that “we now program approximately 31% of all listening on Spotify” via playlists, which has created powerful new brands within Spotify such as Rap Caviar and ¡Viva Latino!. There are now Rap Caviar and ¡Viva Latino! concert series, pointing the way toward an even broader role for the company within the music business, where it’s generating live event and merchandising revenue without having to pay record labels.

He’s succeeded in the [music] business because he’s extremely patient and not high on his own supply, meaning he has not been susceptible to the vices that ruin people in entertainment. Ek’s personality has opened the door to a different kind of relationship with musical artists from what prevailed in the era of cocaine-snorting, thieving record execs. So far, Ek has been focused on changing how creators get paid; in streaming, an artist is compensated every time a song is played, creating lifetime revenue (albeit a fraction of a penny at a time), whereas in the old model they got paid (sometimes) after selling a CD or download. But that’s only the beginning. “Spotify’s first eight to 10 years were focused on consumers,” says R&D chief Soderstrom. “The next eight to 10 will be focused on artists.”

Spotify for Artists is the most visible example of this new directive. The service, which launched in its current form in 2016, allows musicians to access data on who is listening to their work on the platform and to personalize their presence to enhance engagement. Iconic rock band Metallica, which once helped sue Napster out of existence, used this data on tour to customize its setlists based on what local fans listen to most. Smaller artists have used it to identify where to tour, and to activate their superfans. “Whatever your genre is, you can find an audience,” says Spotify chief marketing officer Seth Farbman.

Ek has been talking a lot this year about Spotify’s mission to get 1 million artists to make a living off the platform, but he doesn’t mean there will be 1 million Lady Gagas or Bruno Marses. Financial analysts often compare Spotify to Netflix—a comparison Ek pushes back against—but Ek’s vision of the future looks more like YouTube: a meeting spot for creators and fans, in groups both large and small, and Spotify benefits when transactions happen in this “marketplace.” Ek says: “In that model, it’s almost like you’re managing an economy.”

“The major-label system was built out for the 5,000 biggest artists in the world,” Carter notes. “If we’re going to [enable] a million artists to make a living, that’s going to require an entirely different ecosystem.” In this world, “an artist might be happy making $50,000 a year, supplementing income from other work to help pay their mortgage, raise their kids, by doing what they love. I’m just as committed to that kind of artist. How do we make it so there are a lot more winners,” Carter says, “to redefine what it means to be a winner?”


The definitive timeline of Spotify’s critic-defying journey to rule music

May 2013: Spotify makes its first acquisition: Tunigo, which already helped users find, create and share new music and playlists on Spotify. Turned out to be a good one! It still underpins the company’s editorial playlist strategy to this day.

March 2014: Spotify acquires The Echo Nest, a startup that specializes in using machine learning to make recommendations and predict the type of music users will want to listen to, generating playlists from that data as well as helping advertisers reach those music fans. This also was a great acquisition! It underpins the algorithmically generated playlists such as Discover Weekly.

Is a change goin’ to come?

Last year, according to the IFPI, global revenues for recorded music (as opposed to live performance) grew 8.1 per cent to $17.3bn, driven by digital revenue’s 19.1-per-cent increase to $9.4bn. Of this digital revenue, streaming did the heavy lifting, as the $6.6bn from subscriptions and advertising constituted a 41-per-cent increase from the previous year. In what perhaps will be seen as a watershed moment, digital revenues accounted for the highest proportion of total recorded revenues for the first time ever, at 54 per cent. In nominal terms, music-industry revenues are still 32 per cent below its 1999 peak. Convert the dollars from Prince’s favourite year to today’s, and you’ll find artists, labels, publishers and the like are earning 54 per cent less than they used to.

Despite the launch of advertising channel Vevo, which Mr Morris led, musicians are still getting nickel-and-dimed by Alphabet’s platform and its competitors. Last year, video streaming accounted for a mammoth 55 per cent of all music listened to online, according to the IFPI. In turn, it only contributed 15 per cent of the revenues that Spotify and friends did.

FAANGs are more solo acts than a tech supergroup

The five biggest stocks in the S&P 500 have accounted for an average of 12.3 percent of the index since 1990, the earliest year for which numbers available. By comparison, the index’s allocation to the five FAANGs is 12.8 percent.

There are lots of surprises. First, not all FAANGs are growth stocks, as measured by historical earnings and revenue growth and predicted earnings growth. Apple, for example, scores a negative 0.1 for growth. Google’s growth score is a modest 0.4.

Second, they’re not all wildly expensive, based on stock price relative to book value, earnings, cash flow and other measures. Apple is slightly more expensive than average, with a value score of 0.05. Google and Facebook score a negative 0.45 and 0.39 for value, respectively — not cheap but far from the richest.

Third, some are higher quality than others, as measured by profitability, leverage and stability of operating results, and not in the order investors might think. Apple has a reputation for sky-high profits and reliable revenue, and yet it scores 0.15 for quality. Meanwhile, Netflix spends lavishly on programming and has negative cash flow, and its quality score is 0.63 — second only to Google’s score of 0.68.

Nor is it likely that the FAANGs will ever have much in common because their attributes are constantly changing. Apple, for example, was a much different bet five years ago, scoring high for growth and low for quality and momentum. The probability that all five stocks will be similarly situated at any given time is exceedingly low.

Elon Musk has some fun with Tesla

Now Tesla does have debt: It has three different convertible bonds, but it also has $1.8 billion of straight bonds that it issued last August to quite receptive investors. Those bonds have sold off since issuance and are rated Caa1 at Moody’s, which, again, are not auspicious signs for adding like 20 times as much debt. And my general assumption about Tesla bonds is that they operate on sort of a Netflix theory, in which bondholders get their security not from the company’s cash flows but from the knowledge that there’s a whole lot of equity value beneath them. If you issue billions more dollars of bonds to get rid of that equity, then why would anyone buy the bonds? FT Alphaville notes that the pressure of public markets, for Tesla, “surely pales in comparison to the pressure to maintain bank/ bond covenants and make interest payments.” “Even if say $40 billion could be financed in the high yield market,” note analysts at Barclays, “the annual interest bill would consume $2.7 billion in cash.”

The eight best predictors of the stock market

• The Philosophical Economics blog’s indicator is based on the percentage of household financial assets—stocks, bonds and cash—that is allocated to stocks. This proportion tends to be highest at market tops and lowest at market bottoms. According to data collected by Ned Davis Research from the Federal Reserve, this percentage currently looks to be at 56.3%, more than 10 percentage points higher than its historical average of 45.3%. At the top of the bull market in 2007, it stood at 56.8%. This metric has an R-square of 0.61.

• The Q ratio, with an R-squared of 46%. This ratio—which is calculated by dividing market value by the replacement cost of assets—was the outgrowth of research conducted by the late James Tobin, the 1981 Nobel laureate in economics.

• The price/sales ratio, with an R-squared of 44%, is calculated by dividing the S&P 500’s price by total per-share sales of its 500 component companies.

• The Buffett indicator was the next-highest, with an R-squared of 39%. This indicator, which is the ratio of the total value of equities in the U.S. to gross domestic product, is so named because Berkshire Hathaway Inc.’s Warren Buffett suggested in 2001 that is it “probably the best single measure of where valuations stand at any given moment.”

• CAPE, the cyclically adjusted price/earnings ratio, came next in the ranking, with an R-squared of 35%. This is also known as the Shiller P/E, after Robert Shiller, the Yale finance professor and 2012 Nobel laureate in economics, who made it famous in his 1990s book “Irrational Exuberance.” The CAPE is similar to the traditional P/E except the denominator is based on 10-year average inflation-adjusted earnings instead of focusing on trailing one-year earnings.

• Dividend yield, the percentage that dividends represent of the S&P 500 index, sports an R-squared of 26%.

• Traditional price/earnings ratio has an R-squared of 24%.

• Price/book ratio—calculated by dividing the S&P 500’s price by total per-share book value of its 500 component companies—has an R-squared of 21%.

It’s not terribly hard to find a measure that shows an overvalued market. Then, use a long time period to show the market has performed below average during your defined overvalued period. That’s easy. The difficulty is timing the market. For example, during the housing bubble, what I found interesting was how many people were right, that housing was indeed in a bubble. Lots of people realized it. Also, lots of people thought it would burst in 2004. Then in 2005. Then in 2006. They were right, but their timing was way off. Even if you know the market is overpriced, that doesn’t tell you much about how to invest today.


Hot chart: The A-D Line is roaring higher

You have two options as an investor: you could listen to the media or you could listen to the market. They’ve been pushing the notion lately that only a handful of Tech stocks are leading the way for the market, suggesting a weakening breadth environment. In the real world, however, we are participating in a united rally among Tech stocks as a group.

In fact, the Equally-Weighted Technology Index went out just 0.4% away from another all-time weekly closing high, just shy of it’s record high set last month. This is the Equally-Weighted Index, not the Cap-weighted index that the bears are suggesting is pointing to weakening breadth because the big names are such a large portion. If it was true that only a handful of names are going up and market breadth is deteriorating, the Equally-weighted index, which takes the extra-large market capitalization stocks completely out of the equation, would not be behaving this way.

So when someone tells you that breadth is weakening and only a handful of names are driving the market’s gains, you know they haven’t done the work themselves. They’re just regurgitating what they read or overhead somewhere, which happens a lot.

Natural maniacs

A problem happens when you think someone is brilliantly different but not well-behaved, when in fact they’re not well-behaved because they’re brilliantly different. That’s not an excuse to be a jerk, or worse, because you’re smart. But no one should be shocked when people who think about the world in unique ways you like also think about the world in unique ways you don’t like.

There is a thin line between bold and reckless, and you only know which is which with hindsight. And the reason there’s a difference between getting rich and staying rich is because the same traits needed to become rich, like swinging for the fences and optimism, are different from the traits needed to stay rich, like room for error and paranoia. Same thing with personalities and management styles.

“You gotta challenge all assumptions. If you don’t, what is doctrine on day one becomes dogma forever after,” John Boyd once said.

These maxims are always true

In 1962, Warren Buffett began buying stock in Berkshire Hathaway after noticing a pattern in the price direction of its stock whenever the company closed a mill. Eventually, Buffett acknowledged that the textile business was waning and the company’s financial situation was not going to improve. In 1964, Stanton made an oral tender offer of $11​1⁄2 per share for the company to buy back Buffett’s shares. Buffett agreed to the deal. A few weeks later, Warren Buffett received the tender offer in writing, but the tender offer was for only $11​3⁄8. Buffett later admitted that this lower, undercutting offer made him angry.[12] Instead of selling at the slightly lower price, Buffett decided to buy more of the stock to take control of the company and fire Stanton (which he did). However, this put Buffett in a situation where he was now majority owner of a textile business that was failing.

Being stubborn can cost you money. Buffett has talked about that at length over the years. But what is interesting is Buffett operated Berkshire from 1962 to 1985 and made millions of dollars without doing any publicity. No mass media. No hype. Can you imagine that today?

You know what gets you more customers? Execution. Delighting them. Focusing on them.

Scorched earth: the world battles extreme weather

Lloyds, the London-based insurance market, estimates that as much as $123bn in global gross domestic product in cities could be at risk from the impact of a warming planet, including windstorms and floods.

Meanwhile a 2015 study by the journal Nature found that due to climate change, global incomes were likely to be one-fifth lower in 2100 than they would be with a stable climate. And later this year the UN will issue a landmark report that quantifies the impact of 1.5C of warming, compared with 2C. Leaked copies suggest that the world will pass the 1.5-degree warming target by about 2040.

Curated Insights 2018.08.03

Once in a lifetime, if you’re lucky

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


Business lessons from Rob Hayes (First Round Capital)

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


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

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

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

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

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

Everything bad about Facebook is bad for the same reason

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

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

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

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

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

Thinking about Facebook

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

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

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


Apple’s stock buybacks continue to break records

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

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

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

Bill Nygren market commentary | 2Q18

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

Ferrari slumps after CEO says Marchionne target is ‘aspirational’

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


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

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

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

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

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

Branded Worlds: how technology recentralized entertainment

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

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

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

Curated Insights 2018.07.27

 

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

Consumer startups are dead. Long live consumer startups.

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

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

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

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

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

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

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


The future of media

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

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

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

Airbnb offers investors a unique stay

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

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

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

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

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


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

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

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


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

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

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


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

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

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

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

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

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

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

 

BlackRock ready to spread its web across Europe

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

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

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

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

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

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

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

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

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

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

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

Restaurants must embrace online delivery, and fast

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

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

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

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

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

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

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

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

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

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

Why we need to update financial reporting for the digital era

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

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

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

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

A whiff of rotten eggs may augur an oil shock

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

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

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

Curated Insights 2018.06.24

Tails, you win

Correlation Ventures crunched the numbers. Out of 21,000 venture financings from 2004 to 2014, 65% lost money. Two and a half percent of investments made 10x-20x. One percent made more than 20x return. Half a percent – about 100 companies – earned 50x or more. That’s where the majority of the industry’s returns come from. It skews even more as you drill down. There’s been $482 billion of VC funding in the last ten years. The combined value of the ten largest venture-backed companies is $213 billion. So ten venture-backed companies are valued at half the industry’s deployed capital.

The S&P 500 rose 22% in 2017. But a quarter of that return came from 5 companies – Amazon, Apple, Facebook, Boeing, and Microsoft. Ten companies made up 35% of the return. Twenty-three accounted for half the return. Apple alone was responsible for more of the index’s total returns than the bottom 321 companies combined. The S&P 500 gained 108% over the last five years. Twenty-two companies are responsible for half that gain. Ninety-two companies made up three-quarters of the returns. The Nasdaq 100 skews even more. The index gained 32% last year. Five companies made up 51% of that return. Twenty-five companies were responsible for 75% of the overall return.


16 years late, $13B short, but optimistic: Where growth will take the music biz

The primary problem, however, is how the major labels monopolize royalty payments. Spotify and Apple Music take roughly 30% of total revenues (which goes to operating costs, as well as customer sales tax and platform fees), with the remaining 70% paid out in royalties. Out of this remainder, the major labels keep roughly 70%, with 15% going to performers and 15% to composers. And remember, a hot song often boasts a handful of writers and several performers, each of whom will share in the net royalty (Spotify’s most streamed track in 2017, Ed Sheeran’s “Shape of You,” counts six writers; Kanye West’s 2015 hit “All Day” had four performers and 19 credited writers).

A common rejoinder to this argument is that growth in subscriptions will solve the problem – if everyone had Spotify or Apple Music, per-stream rates would remain low, but gross payments would increase substantially. There are three limits to this argument. First, prices would likely need to drop in order to drive additional penetration. In fact, they already are as the major services embrace student pricing and family plans (which cost 50% more but allow four to six unique accounts): Over the past three years, premium user ARPU has fallen from $7.06 per month to $5.25. To this end, family plans exert significant downward pressure on per-stream rates, as the number of streams grows substantially more than revenue. For related reasons, the industry is also unlikely to return to the days where the average American over 13 spent $80-105 a year (1992-2002). Even if every single American household subscribed to Spotify or Apple Music, per capita spend would be around $65-70. This is still more than twice today’s average of $31, but such penetration is unlikely (in 2017, only 80% of American mobiles were smartphones). Put another way, much of the remaining growth in on-demand streaming will come from adding additional users to existing subscriptions. While this increases total revenue per subscription (from $120 to $180), it drops ARPU to at most $90 and its lowest, $20.

Second, growth in on-demand music subscriptions is likely to cannibalize the terrestrial and satellite radio businesses. In 2017, SiriusXM (which has the highest content costs per listener hour in the music industry) paid out $1.2B in US royalties, roughly 33% of that of the major streaming services. US terrestrial broadcast revenue generates another $3B+ in annual royalties. These formats are rarely considered when discussing the health of the music industry, even though one reflects direct consumer spend. But they provide significant income for the creative community (though notably, terrestrial radio royalties compensate only composers, not performers). As on-demand streaming proliferates and cannibalizes more terrestrial/satellite radio listening (still more than half of total audio time in the United States), streaming royalties will continue to grow – but much of this will come at the expense of radio royalties.

Streaming services have an opportunity to cut out labels by forming direct-to-artist deals or establishing their own pseudo-label services. Not only has this long been predicted, it’s been incubated for years. Since 2015, the major services have cultivated exclusive windows and radio shows with major stars, including Beyoncé, Kanye West and Drake. While this construct still went through the label system, it generates clear business cases for further disintermediation.


How Netflix sent the biggest media companies into a frenzy, and why Netflix thinks some are getting it wrong

Hastings has never really feared legacy media, said Neil Rothstein, who worked at Netflix from 2001 to 2012 and eventually ran digital global advertising for the company. That’s because Hastings bought into the fundamental principle of “The Innovator’s Dilemma,” the 1997 business strategy book by Harvard Business School professor Clayton Christensen. “Reed brought 25 or 30 of us together, and we discussed the book,” Rothstein said of an executive retreat he remembered nearly a decade ago. “We studied AOL and Blockbuster as cautionary tales. We knew we had to disrupt, including disrupting ourselves, or someone else would do it.”

BTIG’s Greenfield predicts Netflix will increase its global subscribers from 125 million to 200 million by 2020. Bank of America analyst Nat Schindler estimates Netflix will have 360 million subscribers by 2030. Netflix estimates the total addressable market of subscribers, not including China, could be about 800 million.

Netflix has another edge in the content wars. While networks make decisions on TV ratings, Netflix plays a different game. Its barometer for success is based on how much it spent on a show rather than hoping every show is a blowout hit, said Barry Enderwick, who worked in Netflix’s marketing department from 2001 to 2012 and who was director of global marketing and subscriber acquisition. Since Netflix is not beholden to advertisers, niche shows can be successful, as long as Netflix controls spending. That also gives Netflix the luxury of being able to order full seasons of shows, which appeals to talent.

“Reality is, the biggest distributor of content out there is totally vertically integrated,” said Stephenson. “This happens to be somebody called Netflix. But they create original content; they aggregate original content; and they distribute original content. This thing is moving at lightning speed.”

Hastings derived many of his strategy lessons from a Stanford instructor named Hamilton Helmer. Hastings even invited him to Netflix in 2010 to teach other executives. One of Helmer’s key concepts is called counter-positioning, which Helmer defines as: “A newcomer adopts a new, superior business model which the incumbent does not mimic due to anticipated damage to their existing business.”

Google’s half-billion bet on JD.com

With the second-largest share of China’s B2C e-commerce market after Alibaba’s Tmall, JD.com already sells most major multinational consumer brands within China. Among CPG brands, 100% of home care and 95% of personal care brands are present on the platform. Gartner L2’s recent Digital IQ Index: Beauty China finds that 97% of mass beauty brands are sold on JD.com, either through brand flagships or JD.com-operated stores. Premium beauty brand presence is slightly lower at 77%. International luxury brands have generally been more wary of mass-market e-tailers, but JD.com has scored major names like Saint Laurent and Alexander McQueen since the launch of its luxury app Toplife and white-glove delivery service.


Google places a $550 million bet on China’s second-largest e-commerce player

For its part, JD.com said it planned to make a selection of items available for sale in places like the U.S. and Europe through Google Shopping — a service that lets users search for products on e-commerce websites and compare prices between different sellers. When retailers partner with Google, it gives their products visibility and makes it convenient for consumers to purchase them online. For the tech giant, its shopping service is important in helping to win back product searches from Amazon and to stay relevant in the voice-powered future of e-commerce.


Google is training machines to predict when a patient will die

Google has long sought access to digital medical records, also with mixed results. For its recent research, the internet giant cut deals with the University of California, San Francisco, and the University of Chicago for 46 billion pieces of anonymous patient data. Google’s AI system created predictive models for each hospital, not one that parses data across the two, a harder problem. A solution for all hospitals would be even more challenging. Google is working to secure new partners for access to more records.

A deeper dive into health would only add to the vast amounts of information Google already has on us. “Companies like Google and other tech giants are going to have a unique, almost monopolistic, ability to capitalize on all the data we generate,” said Andrew Burt, chief privacy officer for data company Immuta. He and pediatric oncologist Samuel Volchenboum wrote a recent column arguing governments should prevent this data from becoming “the province of only a few companies,” like in online advertising where Google reigns.

Adobe could be the next $10 billion software company

“The acquisition of Magento will make Adobe the only company with leadership in content creation, marketing, advertising, analytics and now commerce, enabling real-time personalized experiences across the entire customer journey, whether on the web, mobile, social, in-product or in-store. We believe the addition of Magento expands our available market opportunity, builds out our product portfolio, and addresses a key underserved customer need.”

Both have a similar approach to the marketing side, while Salesforce concentrates on the customer including CRM and service components. Adobe differentiates itself with content, which shows up on the balance sheet as the majority of its revenue .


After 20 years of Salesforce, what Marc Benioff got right and wrong about the cloud

Cloud computing can now be “private”: Virtual private clouds (VPCs) in the IaaS world allow enterprises to maintain root control of the OS, while outsourcing the physical management of machines to providers like Google, DigitalOcean, Microsoft, Packet or AWS. This allows enterprises (like Capital One) to relinquish hardware management and the headache it often entails, but retain control over networks, software and data. It is also far easier for enterprises to get the necessary assurance for the security posture of Amazon, Microsoft and Google than it is to get the same level of assurance for each of the tens of thousands of possible SaaS vendors in the world.

The problem for many of today’s largest SaaS vendors is that they were founded and scaled out during the pre-cloud-native era, meaning they’re burdened by some serious technical and cultural debt. If they fail to make the necessary transition, they’ll be disrupted by a new generation of SaaS companies (and possibly traditional software vendors) that are agnostic toward where their applications are deployed and who applies the pre-built automation that simplifies management. This next generation of vendors will put more control in the hands of end customers (who crave control), while maintaining what vendors have come to love about cloud-native development and cloud-based resources.

What’s so special about 21st Century Fox?

The attraction of Fox’s movie studio is clear. 20th Century Fox owns blockbuster franchises like “X-Men” and “Avatar,” as well as a highly regarded arthouse-movie shop in Fox Searchlight. All told, Fox’s studios collected more than $1.4 billion at the box office last year, according to Box Office Mojo.

One is the company’s 39 percent stake in Sky, the European satellite and broadband internet provider, which is already the subject of a bidding war between Comcast and Fox. Here’s what DealBook wrote about the attraction of Sky last week: Based in London, the broadcaster and internet service provider has 23 million customers in five countries, and it owns valuable broadcasting rights to English Premier League games, Formula One races and other sporting events. It also produces its own entertainment programs and has a streaming service, Now TV.

The other is Star, one of India’s biggest broadcasters, which operates 60 channels and the mobile streaming service Hotstar. Neither Comcast nor Disney has a meaningful presence in the fast-growing India market. Owning one of the country’s top content creators and distributors would give either company both a wealth of locally produced content and platforms on which to provide its other movies and TV shows.


Disney tests pricing power at theme parks

Raising prices—currently around $100 on average days and more than $120 during “peak” times around holidays—could mitigate tourist appetite and increase Disney’s profits. Internal projections at Disney show that even after raising prices at roughly double the rate of inflation over the past five years, it could charge much more than it currently does without driving away too many customers, a person familiar with the company’s parks operations said. Disney parks executives are working on adopting a dynamic pricing model similar to airlines, in which prices fluctuate depending on when a ticket is purchased, this person said.

Disney doesn’t release annual attendance figures for its parks, but more than 38.8 million people visited its domestic locations in 2017, an annual increase of about 1.3%, according to the Themed Entertainment Association trade group. Rising prices and attendance at the parks have contributed to strong growth in the company’s parks and resorts division in recent years. Annual income for the segment has grown more than 70% since 2013, hitting $3.8 billion in 2017.

These are the world’s biggest disruptors (and how the disrupteds are fighting back)

According to Barclays, historically the competitive advantage of legacy consumer focused businesses depended on either: 1) creating a monopoly⁄oligopoly in supply (creating a “scarce resource” in the process), or 2) controlling distribution by integrating with suppliers. Here, the fundamental disruption of the internet has been to turn this dynamic on its head by dominating the user experience. Barclays explains further:

First, while the mega-tech internet companies have high upfront capital costs, their user base is so large that the capital costs per user are insignificant, specially relative to revenue generated per user. This means that the marginal costs of serving another customer is effectively zero, thus neutralizing the advantage of exclusive supplier relationships that were leveraged by legacy distributors. Secondly, the internet has led to the creation of infinitely scalable networks that commoditize⁄modularize supply of “scarce resources” (thus disrupting the legacy suppliers of those resources), making it viable for the disrupting internet company to position itself as the key beneficiary of the industry‘s disruption by integrating forward with end users⁄consumers at scale.

As a result of the disruption, the user experience has become the most important factor determining success in the current environment: the disruptors win by providing the best experience, which earns them the most consumers⁄users, which attracts the most suppliers, which enhances the user experience in a virtuous cycle. This is also why so many legacy businesses find themselves unable to compete with runaway disruptors, whose modest advantage quickly becomes an insurmountable lead due to the economics of scale made possible by the internet. This has resulted in a shift of value from the disrupted to the disruptors who modularize⁄commoditize suppliers, integrate the modularized suppliers on their platform, and distribute to consumers⁄users with which they have an exclusive relationship at scale.

This further means that the internet enforces strong winner-take-all effects: since the value of a disruptor to end users is continually increasing it is exceedingly difficult for competitors to take away users or win new ones. This, according to Barclays, makes it difficult to make antitrust arguments based on consumer welfare (the standard for U.S. jurisprudence), but ripe for EU antitrust regulation (which considers monopolistic behavior illegal if it restricts competition).

Japan robot makers outperform Europeans in profitability

Fanuc, Yaskawa Electric and the other two top players worldwide, ABB of Switzerland and Germany’s Kuka, together hold more than 50% of the global market for industrial robots, Nikkei estimates. Fanuc is strong in numerical control devices for machine tools, while Yaskawa boasts expertise in motor technologies. On the European side, ABB is known for dual-arm robots and supplies a wide array of manufacturing equipment, while Kuka’s strength lies in automotive production equipment such as welding robots.

Fanuc is far ahead of the other three in margin, but Yaskawa has boosted its number in recent years. Its margin rose to 9% last fiscal year, surpassing ABB’s 7% and marking the first time in 14 years that the Japanese duo each logged better margins than their two European rivals. In-house production of core component motors helps the Japanese players secure wider margins, said Yoshinao Ibara of Morgan Stanley MUFG Securities. Fanuc’s thoroughly automated production processes also contribute to high profitability.


Why aren’t we all buying houses on the internet?

“The old idea that real estate is never going to change, that we’re going to pay 6 percent, is completely untrue,” argues Glenn Kelman, the CEO of Seattle-based Redfin, a publicly traded brokerage whose calling card is lower commissions. For Kelman, the rush of cash into real estate startups feels like vindication for a corporate model that investors have regarded with skepticism. Redfin’s low-fee model relies on an army of in-house agents who trade typical commissions for the volume that’s possible with internet-generated leads. A Redfin world isn’t a world without real estate agents, but it is one where fewer agents do more. The nation’s 1.4 million working real estate agents do not particularly like Redfin.

Zillow has a different approach. The company hasn’t disrupted the traditional agent model; on the contrary, it’s dependent on it. In the first quarter of 2018, Zillow raked in $300 million in revenue (Redfin’s revenue for all of 2017 was $370 million); more than 70 percent of that came from the company’s “Premier Agents,” who pay for prime placement on the site to generate leads. In becoming an iBuyer (the industry’s term of art, short for “instant buyer”), the company won’t bite the real estate–brokering hand that feeds it. If anything, the pivot provides a lucrative opportunity for local agents to cement their relationships with a company that is trying to become an industrial-scale homebuyer.

Zillow also isn’t the first company to try acting as a middleman. San Francisco–based Opendoor has made tens of thousands of offers on homes, mostly in Sun Belt cities like Phoenix and Dallas. These places are an easier market than New York or San Francisco: The housing stock is newer, cheaper, and more suburban—which is to say, self-similar. Transactions taxes tend to be lower. The company sees itself as competing against seller uncertainty. “[Zillow] keep[s] the agents at the center of the transaction, which is in line with their business model,” says Cristin Culver, head of communications for Opendoor. “And we keep the customer at the center, which is really our North Star, and that’s the difference.” The company’s rapid appraisals make it possible for sellers to skip agents on the first transaction, and after doing some small renovations (paint, HVAC, basic repairs), Opendoor’s “All Day Open House” allows buyers to find and unlock the house themselves with a smartphone. Easy, right? And yet most of them come with an agent, and the company says it’s one of the biggest payers of commissioners in its markets today.*

Why Japan’s sharing economy is tiny

A generous estimate of the sharing’s economy value in Japan is just ¥1.2trn yen ($11bn), compared with $229bn for China. “It’s a very difficult situation,” says Yuji Ueda of Japan’s Sharing Economy Association. Almost 29m tourists visited Japan last year; the goal is to attract 40m by 2020, when Tokyo hosts the Olympics. But the number of hotel rooms is not keeping up with demand.

Indonesia ecommerce through the eyes of a veteran

50% of all ecommerce orders are still limited to JABODETABEK (The Greater Jakarta Area) while the next 30% are in the rest of Java. This leaves 20% spread unevenly throughout Indonesia. Lots of marketing dollars (and education) will have to be spent outside JABODETABEK to push more traffic and conversion online.

Social commerce is massive in Indonesia and it is believed that transactions happening via Facebook and Instagram may be equally as big as the ‘traditional’ ecommerce. As of now, there is no official way to track how big this market is but looking at the data from various last mile operators based on non-corporate customers, this market share is between 25% and 35% of their volumes and has been constantly growing.

Domestic ecommerce supply chain design is becoming more critical in ensuring lower OPEX. Decentralisation of distribution centres are happening with various major marketplaces and 3PL investing in distribution centers (DC) outside JABODETABEK with the objective of bringing products closer to market and also reducing the last mile cost. With a long term view, some too have started investing in having a presence in 3rd Tier Cities outside Java, in line with the government’s infrastructure development.


Malaysia’s economy more diversified than thought

While commodities make up about 20% of total exports, electronics constitute an even larger portion: 37% in 2017. Even when oil prices were at their peak in 2012, commodities comprised 30% of total exports versus electronics at 33%.

Higher oil prices add to the government’s fiscal revenue. We estimate that for every 10% rise in global oil prices, Malaysia’s current account increases by about 0.3 percentage points of GDP after four quarters.

Government estimates suggest that every US$1 per barrel increase in oil prices adds about RM300mil to revenue. That said, oil revenue is only budgeted at 14.8% of revenue for 2018 compared with the peak in 2009 when it constituted some 43% of total fiscal revenue.


SEC says Ether isn’t a security, but tokens based on Ether can be

For the SEC, while cryptocurrencies like bitcoin and ether are not securities, token offerings for stakes in companies that are built off of those blockchains can be, depending on the extent to which third parties are involved in the creation or exchange of value around the assets. The key for the SEC is whether the token in question is being used simply for the exchange of a good or service through a distributed ledger platform, or whether the value of the cryptocurrency is dependent on the actions of a third party for it to rise in value.

“Promoters, in order to raise money to develop networks on which digital assets will operate, often sell the tokens or coins rather than sell shares, issue notes or obtain bank financing. But, in many cases, the economic substance is the same as a conventional securities offering. Funds are raised with the expectation that the promoters will build their system and investors can earn a return on the instrument — usually by selling their tokens in the secondary market once the promoters create something of value with the proceeds and the value of the digital enterprise increases. Just as in the Howey case, tokens and coins are often touted as assets that have a use in their own right, coupled with a promise that the assets will be cultivated in a way that will cause them to grow in value, to be sold later at a profit. And, as in Howey — where interests in the groves were sold to hotel guests, not farmers — tokens and coins typically are sold to a wide audience rather than to persons who are likely to use them on the network.”


Study: Charts change hearts and minds better than words do

Through survey experiments, Nyhan and Reifler arrived at a surprising answer: charts. “We find that providing participants with graphical information significantly decreases false and unsupported factual beliefs.” Crucially, they show that data presented in graphs and illustrations does a better job of fighting misperceptions than the same information presented in text form.