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 2018.07.27

 

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.

Curated Insights 2018.05.20

The spectacular power of Big Lens

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

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

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

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

The Moat Map

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

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

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

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

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

How much would you pay to keep using Google?

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

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


There is another

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

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


Subscriptions for the 1%

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

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

The Apple Services machine

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

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

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

MoviePass: the unicorn that jumped into Wall Street too soon

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

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

Cerebras: The AI of cheetahs and hyenas

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

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

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


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

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

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

China buys up flying schools as pilot demand rises

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

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

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

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

California will require solar power for new homes

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

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

Just half a percent

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

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

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

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

Company Notes 2018.03.23

AirAsia in talks to set up Myanmar airline

…in talks with a potential partner to open an airline serving Myanmar, in a move that would help the low-cost carrier cover up to 95% of the Southeast Asian travel market.

“Once you’ve covered Vietnam and Myanmar, you’ve got all the big (Southeast Asian) populations. Vietnam — we’re talking about October, we’ve had great support from the Vietnam government and we have a great partner. My team are very bullish. It’s not going to be a big airline there, because the airport infrastructure is not there. But it is 50 million people and it will develop over time.”

“The biggest asset is our data,” Fernandes said. “While southeast Asian companies like (Indonesian ride-hailing company) Grab have to go out and spend a fortune to build that brand and data, we have 89 million customers travelling with us every year and we have data going back 18 years. We’re more than an airline — that’s the message for 2018. (Like) Amazon is more than a bookseller.”


Apex Healthcare goes into e-commerce

“[At full capacity,] SPP Novo is designed to increase our solid production capacity by up to three times, but we will be fitting out with approximately double the capacity upon commissioning by [the] end of 2018,” said Kee.

He added that about RM130 million of its revenue is derived from the manufacturing segment, and about half of this is from solid products. A back-of-the-envelope calculation suggests that if Apex doubles its solid product capacity, the group may see an increase in its solid product sales to RM130 million.

“For Europe, we are working on contract manufacturing opportunities,” said Kee, noting that the group is in the midst of evaluating merger and acquisition targets, as well as joint-venture opportunities in Europe and other developed markets. “The EU GMP certification will enable the group to stay ahead of the game, ensuring the best quality of its products,” he added.

Are REITs a good buy now?

According to Bloomberg data, the average dividend yield for the 18 listed REITs on Bursa Malaysia, as of yesterday, stood at 6.14%. In comparison, the 10-year Malaysian Government Securities’ (MGS) yield has been held at 3.9% to 4% since Bank Negara Malaysia’s key rate hike in January. MGS is the typical benchmark to which investors use to compare REITs, which are seen as a comparatively riskier investment.

But analysts told The Edge Financial Daily the rising average REIT yield is more reflective of a decline in share prices, rather than being driven by growth in distribution per unit (DPU). Hence, investors seeking to buy on weakness should consider REITs on a case-by-case basis.


Airbnb collaboration with Malaysia previews taxes on Internet economy

The San Francisco-based home-sharing company is moving to finalize a deal with tax authorities, which will apply a new tourism tax of RM10 ($2.55) per night to Airbnb members who rent out five rooms or more. The tourism levy presages an agreement on goods and services taxes.

But Southeast Asia’s third-biggest economy will start collecting tax from Airbnb hosts with at least five rooms, whether in one or multiple properties. Airbnb typically signs what it calls voluntary collection agreements with governments to transfer hotel and tourism tax payments from its members to the authorities. The decade-old company said it has transmitted half a billion dollars’ worth of such taxes to more than 340 jurisdictions globally.


Divestment appetite in Southeast Asia more than doubles, says EY survey

“More than two-thirds (68%) said that their decision to divest was directly influenced by the evolving technological landscape. About half (51%) of Southeast Asian companies said that the need to fund new technology investments will make them more likely to divest — using the proceeds to improve operating efficiency (79%), and address changing customer needs (87%) in their core businesses,” said EY in a statement today.


Malaysia tells tech entrepreneurs to give it a second look

Still, Malaysia lags behind its neighbors in drawing investments. Singapore attracted $7.2 billion in tech startup capital from 2012 through September 2017, the most in Southeast Asia, according to CB Insights. Indonesia pulled in $4.6 billion, while Malaysia got $1.3 billion during the same period.

Company Notes 2017.12.22

Berjaya Sports Toto Q2 FY2018 Results

H.R. Owen recorded a decrease in revenue of 8% as compared to the previous year corresponding quarter primarily due to drop in sales from the new and used cars sector during the current quarter as a result of softening demand in the United Kingdom car market as well as the product life cycle of the car models available for sale. It recorded a pre-tax loss of RM4.0 million as compared to pre-tax profit of RM5.1 million reported in the previous year corresponding quarter mainly due to the decrease in revenue and also lower profit margins earned from certain new car sales during the current quarter under review.


Top Glove Q1 FY2018 Results

The improved results followed strong demand growth stemming from developed and emerging markets, where glove demand is rapidly on the rise. Further contributing to demand was the disruption in vinyl glove supply following China’s strict enforcement against polluting industries which benefited both natural rubber and nitrile glove sales. Internally, new capacity coming onstream, as well as continuous improvement initiatives in terms of automation, better production lines and cost-saving were also instrumental in contributing to the strong performance.


Poh Huat Resources Q4 FY2017 Results

In line with the sustained demand for furniture in the US market, our operations continued to enjoy strong orders from customers from the US for both the office and home segment. In particular, shipment of our new ranges of panel based home products from our Malaysian operations to the US has rammed up over the last 12 months as our efficiency improves. In Vietnam, we also commenced shipment of several newer ranges of bedroom sets for which production runs is expected to smoothen over the next few months. Overall the Group expects this trend to continue for the remaining financial year.


Comfort Gloves Q3 FY2018 Results

Nitrile glove now accounts for 61% of Malaysian rubber glove export. As overall demand for nitrile gloves increases, the market is seeing increase segmentation and differentiation leading to an increase demand for specialty gloves. Through dedication to process rationalization and improving operational agility, the Group is confident in capturing greater market share and strengthening margins. The Group is confident that meeting customer expectations and continuous innovation will strengthen our position as the bespoke specialty glove manufacturer.

CAB Cakaran set to fly even higher after record year

Next year, Chuah said the group intends to increase broiler meat capacity to about 7.5 million birds per month, and up to 11 million birds a month for day-old chick. “We will not expand for the sake of expanding. For the broiler business, expansion is not an issue as long as we got the money and the land. But the key question is whether the demand is there,” he said.

Chuah said CAB has budgeted a sum of about RM50 million as capital expenditure for FY18, to upgrade the group’s facilities and machinery. “These upgrades are meant to cater for additional market demand. If we want to grow on a larger scale, we will have to look into the existing market, so we are also on the lookout to buy medium or smaller broiler businesses, especially those businesses that have no second generation successors,” he said.

“The construction will take about 12 months to complete and contribution will likely begin in 2019. We are targeting 4.5 million birds per month for the broiler and three million eggs per day for the layer in 2019. We currently hold 10% of the joint venture, and over the next five years, we have an option to increase our stake to 30% based on the inception price. In that way we don’t have to incur so much expenditure now.”


Kulim plant to boost Osram’s output to near market-leader’s level

“For more than one decade, Osram has been a strong number two in the market for opto semiconductors for lighting with a market share of more than 8%. With our new capacities in Kulim, the gap to the number one (Nichia Corp) will shrink further.”

“In our opto-semiconductor business, we have reached an operating margin of more than 28% before the opening of our new fabrication plant (in Kulim). Our target for the coming years is between 25% and 29%. Of course, the cost factor in Malaysia plays a role but our venture in Kulim is more about raising capacity for a still growing demand.”

“The market continues to be dominated by the replacement of traditional lighting with efficient LED lighting, while the LED share in the automotive segment is growing rapidly in interior lighting, and headlights. We also are developing exciting technologies for autonomous vehicles and using our LED chips; we are enabling new technologies for vehicle sensing, orientation and navigation. Our horticulture lamps are designed to grow leafy greens and herbs in a controlled environment, ensuring plants receive the best light to grow to their fullest potential with improved flavour.”


Techfast to source chemical products from China’s Tecore

Cape and Oriem will be Tecore’s Malaysian business partners to engage in the supply and sale of Tecore’s products, including clear epoxy molding compound and silicone phosphor film.

Techfast said Cape and Oriem will sell these products to its customers, which are multinational companies that engage in the LED business.

The group said Cape and Oriem’s services also include product evaluation testing, customer demand information collation and customer supply chain co-ordination on behalf of Tecore as its local business partners.

e-Conomy SEA spotlight 2017: Unprecedented growth for Southeast Asia’s $50B internet economy

There will be 330M monthly active internet users by year-end 2017, adding over 70M new users since 2015 at 13% CAGR. In Southeast Asia, mobile is the internet, as more than 90% of Southeast Asia’s internet users are on smartphones. It is hard to overestimate the absolute prominence of mobile as the access point and driver of Southeast Asia’s internet economy. Users in Southeast Asia are incredibly engaged, spending an average of 3.6 hours per day on mobile internet,1 more than in any other region in the world.

We estimate that Southeast Asia’s internet economy will reach $50B in 2017. Growing at 27% CAGR, it has outpaced the 20% 10-year CAGR projected in Google-Temasek e-Conomy SEA and is on a solid trajectory to exceed $200 B by 2025. All sectors of the internet economy have experienced solid growth in 2017. Online travel reached $26.6B led by growth in airline and hotel online bookings. Online media touched $6.9B driven by online ads and gaming. E-commerce and ride hailing have been under the spotlight growing the fastest at over 40% CAGR, capturing consumers’ preferences with evolving business models, and attracting the majority of the investments in the region. As a result, they are the focus of Google-Temasek e-Conomy SEA Spotlight 2017.

GLCs are crowding out private investment — IDEAS

“An often-cited concern relates to the preferential treatment that they receive with respect to government procurement. They could also enjoy various other benefits, including direct subsidies, concessionary financing, state-backed guarantees, and exemptions from antitrust enforcement or bankruptcy rules. Hence, GLCs find it easier and more profitable to increase investment in sectors which they already have a significant presence — a level of involvement usually made possible by their special and preferred status to begin with.”

“The results revealed that when GLCs account for a dominant share (60% or more) of revenues in an industry, investment by private firms in that industry is significantly negatively impacted. Conversely, when GLCs do not dominate an industry, the impact on private investment is not significant.”

Curated Insights 2017.11.19

Winners and losers In the patent wars between Amazon, Google, Facebook, Apple, and Microsoft

Google: The full stack AI company

A startup might achieve a breakthrough in an AI vertical, but reaching hundreds of millions of users could take years. The same breakthrough in Google’s hands could be “turned on” for a billion users overnight. Users benefit immediately, while Google’s products become sticker and more valuable.

Google is already seeing a similar benefit. While competitors are using off the shelf processors for deep learning, Google’s TPU provides higher throughout, reduced latency and, perhaps most importantly, reduced power consumption. Because data center construction is Google’s largest capital spending line item and power its highest operating cost, the TPU meaningfully reduces both Google’s capex and opex.

Google’s AI efforts have built a fully integrated company that spans algorithms, data, hardware, and cloud services. This approach helps funnel the world-class AI of Google’s consumer products to its enterprise offerings, providing Google Cloud with a competitive edge. Bringing chip design in-house increases Google’s AI moat by improving performance, lowering latency, and reducing cost. Perhaps most critically, vertical integration enhances its organizational agility: Google can steer all parts of its organization to bring a new product or service to market. Consequently, Google’s AI will be at the forefront of the innovation for years to come.


How Facebook figures out everyone you’ve ever met

Shadow contact information has been a known feature of Facebook for a few years now. But most users remain unaware of its reach and power. Because shadow-profile connections happen inside Facebook’s algorithmic black box, people can’t see how deep the data-mining of their lives truly is, until an uncanny recommendation pops up.

Facebook doesn’t like, and doesn’t use, the term “shadow profiles.” It doesn’t like the term because it sounds like Facebook creates hidden profiles for people who haven’t joined the network, which Facebook says it doesn’t do. The existence of shadow contact information came to light in 2013 after Facebook admitted it had discovered and fixed “a bug.” The bug was that when a user downloaded their Facebook file, it included not just their friends’ visible contact information, but also their friends’ shadow contact information.

It’s what the sociologist danah boyd calls “networked privacy”: All the people who know you and who choose to share their contacts with Facebook are making it easier for Facebook to make connections you may not want it to make. Shadow profile data powers Facebook’s effort to connect as many people as possible, in as many ways as possible. The company’s ability to perceive the threads connecting its billion-plus users around the globe led it to announce last year that it’s not six degrees that separate one person from another—it’s just three and a half.

“Mobile phone numbers are even better than social security numbers for identifying people,” said security technologist Bruce Schneier by email. “People give them out all the time, and they’re strongly linked to identity.”


Will Amazon disrupt healthcare?

Amazon is exceptional at developing formulas to increase efficiency and decrease waste — two vital elements sorely lacking in the current healthcare paradigm.

Baby boomers may be tethered to their in-person interactions with physicians and pharmacists, but millennials are not. They are Amazon’s target audience.

Amazon has several key advantages in a world of personalized medicine — loads of storage space because of its AWS business, sophisticated predictive algorithms, and long-standing, data-rich relationships with millions of “patients”.


How Netflix works: the (hugely simplified) complex stuff that happens every time you hit Play

Netflix estimates that it uses around 700 microservices to control each of the many parts of what makes up the entire Netflix service…And that’s the tip of the iceberg. Netflix engineers can make changes to any part of the application and can introduce new changes rapidly while ensuring that nothing else in the entire service breaks down.

Turns out that Netflix and Amazon’s partnership turned out to be a huge win-win situation for both companies. Netflix turned out to be AWS’s most advanced customers, pushing all of their capabilities to the maximum and constantly innovating upon how they can use the different servers AWS provided for various purposes — to run microservices, to store movies, to handle internet traffic — to their own leverage. AWS in turn improved their systems to allow Netflix to take massive loads on their servers, as well as make their use of different AWS products more flexible, and used the expertise gained to serve the needs of thousands of other corporate customers. AWS proudly touts Netflix as it’s top customer, and Netflix can rapidly improve their services and yet keep it stable because of AWS.


People watch Netflix unabashedly at work (and in public toilets, too)

About 67% of people now watch movies and TV shows in public, according to an online survey it commissioned of 37,000 adults around the world. The most popular public places to stream are on planes, buses, or commuting, the survey found. But 26% of respondents also said they’ve binged shows and movies at work. People in the US were more likely to stream from the office, while users around the world were more likely to stream during their commutes.

For Netflix, mobile still makes up a small chunk of overall viewing. Netflix said it was about 10% as of 2016. But the company also said half of its users stream from a smartphone during any given month. Its audience is now around 110 million subscribers worldwide.


Will traditional auto makers steal the future from Tesla?

Even if electric cars take off in the early to mid-2020s when their cost is likely to be comparable to gas- and diesel-powered vehicles, Garschina thinks the major global auto makers will still dominate the business. Credit Suisse auto analyst Daniel Schwarz recently wrote that auto makers would emerge as winners from simpler, less capital-intensive production of electric vehicles over the next 10 years.

Investors might not be giving the auto industry credit for manufacturing skills honed over decades. As Tesla has found, mass-producing automobiles isn’t easy; the company continues to lose money and grapple with production woes. “The more we learn about new technologies, the clearer it becomes that the key auto makers won’t be disrupted overnight,” says Arndt Ellinghorst, a European auto analyst with Evercore ISI.

Morgan Stanley has estimated that it could take $2.7 trillion of infrastructure investment by 2040 to support a global electric fleet, including 473 million home chargers and seven million super-charging stations. It’s unclear where all that money will come from. The additional need for electricity would be equivalent to current U.S. demand.


These hot restaurants aren’t on maps, only in apps

Virtual restaurants, with their low overhead, are allowing restaurateurs to shift away from the capital-intensive model that kills 60% of new restaurants in their first five years toward something decidedly more techy.

By far the biggest company in the app-driven food-on-demand space is Grubhub. It is so invested in virtual restaurants that two years ago it lent one of its own customers, Green Summit Group, $1 million to expand. Green Summit, which launched in 2013, has kitchens throughout New York City, Todd Millman, its co-founder, says. There might be up to 10 different “restaurants” In a single kitchen. Though they appear on Grubhub as separate establishments, each with a distinct cuisine, all the food might be prepared in the same kitchen by the same staff.

In San Jose, Grubhub competitor DoorDash has built out its own kitchen space. There is one tenant so far, a pizzeria called the Star. (More are on the way, DoorDash says.) To save on rent, DoorDash built the facility in a disused portion of the Santa Clara County Fairgrounds. One month in, the Star’s savings have been notable, says Ben Seabury, chief operating officer of the 1100 Group, which owns the virtual restaurant. Typically, 30 cents of every dollar that comes into one of his restaurants goes to labor, says Mr. Seabury. But without waiters, bartenders and dishwashers, that cost is just 10 cents on the dollar—and even less when demand is high.

Virtual restaurants tap into a larger trend: Americans’ increasing aversion to cooking for themselves. For the first time ever in 2016, Americans spent more at eating and drinking establishments than on groceries, according to U.S. Census data. The food-delivery market is a small slice of that sector: It is only $30 billion in 2017, but Morgan Stanley estimates it could balloon to $220 billion within a few years.

 

Digitizing cash transactions could become quite profitable

Turning financial data into an asset is an early stage opportunity. On a global basis, more than 80% of transactions still occur in cash. Indeed, companies and, at some point, consumers have yet to digitize more than 1.4 trillion transactions per year, roughly equivalent to the number of Google searches per year. Our research indicates that the information associated with digital cash transactions could generate approximately $100 billion of revenue per year.

While we believe that disrupting and digitizing cash transactions represents a large “fintech” opportunity, the benefits are unlikely to accrue to the traditional financial services industry, as it lacks the requisite innovation agility, cost structure, and technical abilities to access and exploit it. Instead, innovative technology companies like Amazon, Google, Facebook, and Tencent that already are transforming big data into big revenue, probably will capitalize on this opportunity.

Companies with the ability to develop deep and dynamic insights into consumer purchasing behavior will be in the best position to capitalize on this $100 billion revenue opportunity. Square, Tencent, Facebook, Amazon, and Alibaba are building the most precise consumer profiles, enabling them to offer value added services like capital loans and insurance either now or in the not-to-distant future. We believe these companies are building significant moats, or barriers to entry, with “value loops” generating more data from their consumers and building products that take increasing share in the marketplace.


Hasbro sets its sights on Mattel

Hasbro has held up relatively well. Chief Executive Brian Goldner has forged close ties to Hollywood, where the company is producing movies and is a favored partner for creating toys tied to films. In recent years, Hasbro won the coveted license for Walt Disney Co.’s Disney Princess characters and has long made toys tied to the media company’s “Star Wars” franchise. Hasbro is also more advanced in telling stories and creating content around its large brands, including a string of feature-length films for its Transformers franchise and more-recent launches like a My Little Pony movie.

Both Hasbro and Mattel were stung by the Toys “R” Us bankruptcy, which threw a major sales channel into turmoil and prompted them to stall deliveries to the retailer, but Mattel’s problems run deeper. The new regime laid out a plan that would keep the company in turnaround mode for a few more years as it tries to fix problems that it blamed on past management. Those included a proliferation of new toys with little staying power that heaped additional costs and complexity onto Mattel’s supply network.

A bigger concern was that a tie-up could trigger change-of-control clauses in the numerous licensing agreements with the likes of Disney, Nickelodeon and others.

Free games fuel $370 billion stock rally – and fears of a crash

In free-to-play games, 2% of players typically generate around 50% of revenue, according to consultancy Yokozuna Data. High-rollers often spend at least $500 per month. Today, the industry generates $100 billion in revenue with about 70 percent coming from in-game goods and services, according to Goldman Sachs Group Inc.

The industry is exploring dark territory. Last month, an Activision Blizzard Inc. patent surfaced which described how machine learning could be used to entice players to spend more. For example, a player could be paired with a teammate who owns a special paid item, and then encourage the player to buy it too.


It’s amazingly cheap to acquire a fleet of Airbus jets

Bill Franke’s airlines are generally fast-growing and profitable, in part because of low expenses and using the latest fuel-efficient jets. All three have exclusively adopted the A320 jet family for cost reasons too, as it makes it easy to swap flight crews and maintenance is less complicated.

Instead of buying jets outright, Frontier, Wizz and Volaris use sale-and-leasebacks. This makes financial sense. One industry observer says the cost of lease finance might be half that of funding an aircraft with equity because of the flood of cheap capital, much of it Chinese. By avoiding ownership, airlines also sidestep residual value risk. If a plane’s value falls, that’s the leasing company’s problem, not Franke’s.


Bob Lutz: Everyone will have 5 years to get their car off the road or sell it for scrap

We don’t need public acceptance of autonomous vehicles at first. All we need is acceptance by the big fleets: Uber, Lyft, FedEx, UPS, the U.S. Postal Service, utility companies, delivery services. Amazon will probably buy a slew of them. These fleet owners will account for several million vehicles a year. Every few months they will order 100,000 low-end modules, 100,000 medium and 100,000 high-end. The low-cost provider that delivers the specification will get the business.

These transportation companies will be able to order modules of various sizes — short ones, medium ones, long ones, even pickup modules. But the performance will be the same for all because nobody will be passing anybody else on the highway. That is the death knell for companies such as BMW, Mercedes-Benz and Audi. That kind of performance is not going to count anymore.

Car dealers will continue to exist as a fringe business for people who want personalized modules or who buy reproduction vintage Ferraris or reproduction Formula 3 cars. Automotive sport — using the cars for fun — will survive, just not on public highways. And like racehorse breeders, there will be manufacturers of race cars and sports cars and off-road vehicles. But it will be a cottage industry. The era of the human-driven automobile, its repair facilities, its dealerships, the media surrounding it — all will be gone in 20 years.


Sean Stannard-Stockton interview: Shifting competitive landscapes

Today, if you log-on to Amazon and type in what you’re looking for – not a brand name, but a type of product – the #1 ranked item, regardless of brand, is likely to have thousands of reviews. If those reviews are say 4 or 4 ½ stars or better – with reviews from thousands of people, most consumers will happily purchase the item, no matter what the brand is. In this case, Amazon has effectively not just become a logistics provider, not just made shipping easy, not just benefitted from network effects, but it has inserted its own brand into the purchasing behavior – and so the consumer says, ”I trust Amazon and Amazon’s reviews so much that I don’t need to spend time searching or depending on a brand name, I can simply purchase the product no matter what its brand is.”

 

U.S. to dominate oil markets after biggest boom in world history

By 2025, the growth in American oil production will equal that achieved by Saudi Arabia at the height of its expansion, and increases in natural gas will surpass those of the former Soviet Union, the agency said in its annual World Energy Outlook. The boom will turn the U.S., still among the biggest oil importers, into a net exporter of fossil fuels.

Reflecting the expected flood of supply, the agency cut its forecasts for oil prices to $83 a barrel for 2025 from $101 previously, and to $111 for 2040 from $125 before.

 

I always used that as a metaphor for businesses. The customers pour in the Tender Vittles and in the U.S., when you had a union, they would fight and spill the whole bowl of Tender Vittles. In the end, no one could eat anymore. I looked at U.A.W. “It’s insane, they’re going to kill their company.” Sure enough, they damn near did. General Motors was almost bankrupt. In Germany, the unions have representatives on the board of the company. Yes, they say, “The first thing” — that this bowl of Tender Vittles — “we have to make sure that the bowl is there. We can fight all we want, but don’t spill the bowl.” You don’t destroy your company. That was not the attitude of Anglo-Saxon unions, either in England or the U.S.


Countries with the most farmland

The USDA now estimates that there is 15%-20% more farmland on earth than we expected. That’s 250 to 350 million more hectacres! With this addition, the USDA estimates there’s 1.87 Billion acres of farmland on earth.

In terms of total net cropland, this new study declares India as number 1.

 

 

Electric cars’ green image blackens beneath the bonnet

The Earth’s ozone hole is shrinking and is the smallest it has been since 1988

Warmer-than-usual weather conditions in the stratosphere are to thank for the shrinkage since 2016, as the warmer air helped fend off chemicals like chlorine and bromine that eat away at the ozone layer, scientists said. But the hole’s overall reduction can be traced to global efforts since the mid-1980s to ban the emission of ozone-depleting chemicals.

In June, scientists identified a possible threat to the recovery, believing dichloromethane — an industrial chemical with the power to destroy ozone — doubled in the atmosphere over the past 10 years. If its concentrations keep growing, it could delay the Antarctic ozone layer’s return to normal by up to 30 years, according to the study published in the journal Nature Communications.


How much is the Great Barrier Reef worth? Economists just figured it out

It came up with a value of A$56 billion ($43 billion) based on an asset supporting tens of thousands of jobs and which contributes A$6.4 billion to the economy. “Valuing nature in monetary terms can effectively inform policy settings and help industry, government, the scientific community and the wider public understand the contribution of the environment, or in this case the Great Barrier Reef, to the economy and society,’’ the Deloitte report said. “The tight and unforgiving deadline the Great Barrier Reef is up against necessitates an understanding of its true value to know what kind of policy action is required in response.’’


Why do we love pets? An expert explains.

In his latest book, Bradshaw argues that our fascination with pets is not because they’re useful, nor even because they’re cute, and certainly not because they’ll make us live longer. Instead, he writes, pet-keeping is an intrinsic part of human nature, one rooted deeply in our own species’ evolution.

People with animals, or as simply described as having a friendly dog with them, instantly become more trustworthy in the eyes of the person who’s encountering that person or having that person described to them.

The idea that simply getting a pet is going to make you happy and de-stress you is not going to work if you don’t do the homework about what the animal needs.

Both dogs and cats are carnivores — the cat is a very strict carnivore. The idea that we can continue to essentially farm the world in a way that provides enough meat for dogs and cats to eat, let alone humans, is probably not sustainable. Whether it will be possible for people to continue to keep these animals, or what kinds of substitutes they find if it does become impossible, I think is going to be fascinating, if somewhat painful for the people involved.

 

Why $450 Million for this painting isn’t crazy

Would 7.5 million people a year pay an average of 9 euros to visit the Louvre if La Gioconda, as the painting is sometimes called, weren’t there? If just a million of them passed on it, the museum would lose the entire amount paid for “Salvator Mundi” over 50 years.

It’s difficult to imagine anyone hoping to make much of a profit on a resale after paying such an outrageous price. But building a museum’s pitch for visitors around it could be a way to make economic sense out of the deal.