Curated Insights 2019.04.26

Spotify’s stock is risky because the music industry is not changing fast enough

The international market is a different story. Tencent Music Entertainment Group (TME) dominates China. (Spotify has taken a minority stake in the company.) Outside of China, Spotify is the clear global market leader, with an estimated 31% market share, ahead of Apple (AAPL), at 17%; Amazon.com (AMZN), at 12%; and Sirius XM Holdings (SIRI), which now owns Pandora, at 11%, according to Credit Suisse . YouTube’s paid music services are still relatively small, but one survey found that free YouTube videos accounted for nearly half of the time that people in 18 countries spent listening to music.

Most of the world doesn’t pay for streaming music, choosing to listen on the radio or to pirate content, which still accounts for 38% of the market, Credit Suisse says. The bullish case for Spotify implies that many of those people can be persuaded to pay up. Even bearish analysts expect the company to more than double its global paid subscriptions over the next five years.

Curated Insights 2019.04.05

The risk of low growth stocks: Heighten risk to the best companies

Most simply, ROIC measures how many incremental dollars of earnings a company earns by reinvesting their earnings. As a simple illustration, a company with an average 10% ROIC needs to invest 50% of their earnings to grow 5% (10%*50%=5%). A company with a 50% ROIC only needs to reinvest 10% of earnings to grow 5% (50%*10%=5%). In the former case, $0.50 of every dollar of earnings is not needed to fund growth, while in the latter case $0.90 is not needed to fund growth. This means that the higher ROIC company will generate 80% more free cash flow than the average ROIC company making the company 80% more valuable. This is why we focus on ROIC in our analysis. High ROIC businesses are significantly more valuable than average ROIC companies even when they produce the same level of growth.

Sony’s streaming service Crackle sells majority stake to Chicken Soup for the Soul

The transfer of ownership for Crackle, however, arrives at a time when ad-free streaming services like this are seeing newfound interest, with Amazon’s launch of IMDb’s FreeDive, Roku’s The Roku Channel, Walmart’s Vudu, Viacom’s new addition Pluto, Tubi and others now making gains.

As part of the deal, Sony will contribute to the new venture its U.S. assets, including the Crackle brand, user base and ad rep business, according to The Hollywood Reporter. It also will license to Crackle Plus movies and TV shows from the Sony Pictures Entertainment library, as well as Crackle’s original programming, like its shows “Start Up” and “The Oath,” for example.

CSS Entertainment will bring six of its ad-supported networks — including Popcornflix, Popcornflix Kids, Popcornflix Comedy, Frightpix, Espanolflix and Truli, plus its subscription service Pivotshare — to Crackle Plus.

The combination will lead Crackle Plus to become one of the largest ad-supported video-on-demand platforms in the U.S., the companies claim, with nearly 10 million monthly active users and 26 million registered users. The new service will also have access to more than 38,000 combined hours of programming, more than 90 content partnerships and more than 100 networks.

Andreessen Horowitz is blowing up the venture capital model (again)

So Andreessen Horowitz spent the spring embarking on one of its more disagreeable moves so far: The firm renounced its VC exemptions and registered as a financial advisor, with paperwork completed in March. It’s a costly, painful move that requires hiring compliance officers, audits for each employee and a ban on its investors talking up the portfolio or fund performance in public—even on its own podcast. The benefit: The firm’s partners can share deals freely again, with a real estate expert tag-teaming a deal with a crypto expert on, say, a blockchain startup for home buying, Haun says.

And it’ll come in handy when the firm announces a new growth fund—expected to close in the coming weeks, a source says—that will add a fresh $2 billion to $2.5 billion for its newest partner, David George, to invest across the portfolio and in other larger, high-growth companies. Under the new rules, that fund will be able to buy up shares from founders and early investors—or trade public stocks. Along with a fund announced last year that connects African-American leaders to startups, the new growth fund will give Andreessen Horowitz four specialized funds, with more potentially to follow.

Curated Insights 2019.03.08

The difference between the natural world and the investment world

You have to understand that there are no physical laws at work in investing. And the future is uncertain, and vague, and random. And psychology dominates.

Richard Feynman said, “Physics would be much harder if electrons had feelings.” You come in the room, you flip up the switch, and the lights go on. Every time! Why is that? Because the electrons flow from the switch to the lights. They never flow the other way. They never go on strike. They never fall asleep. They never say, ‘Ah today I don’t feel like flowing from the switch to the light.’ That’s physical science.

You have to understand the distinction between your field [architecture] and the field of investing, where there are no laws. There are only tendencies.

Facebook’s privacy cake

Why can Facebook deliver most of the value? Because they are still Facebook! They still have the core Facebook app, Instagram, ‘Like’-buttons scattered across the web — none of that is going away with this announcement. They can very much afford a privacy-centric messaging offering in a way that any would-be challenger could not. Privacy, it turns out, is a competitive advantage for Facebook, not the cudgel the company’s critics hoped it might be.

Why can Facebook deliver most of the value? Because they are still Facebook! They still have the core Facebook app, Instagram, ‘Like’-buttons scattered across the web — none of that is going away with this announcement. They can very much afford a privacy-centric messaging offering in a way that any would-be challenger could not. Privacy, it turns out, is a competitive advantage for Facebook, not the cudgel the company’s critics hoped it might be.


Zillow’s billion dollar seller lead opportunity

Here’s the kicker: Zillow claims about 45 percent of consumers that go through the Zillow Offers funnel end up listing their home. That’s a high conversion rate reflective of a high intent to sell; about 10 times higher than Opcity’s conversion rate. Assuming a 1 percent referral fee, a $250,000 home, and a conversion rate of 45 percent, those 19,800 leads are worth $22 million in revenue to Zillow, almost all profit. Compare that to the estimated profit of its iBuyer business (1.5 percent net profit), which, on 200 houses, is $750,000. The value of the seller leads is worth almost 30 times the profit from flipping houses!


Will Zillow Homes build a durable competitive advantage in the iBuyer market?

Let’s parse through these claims. The argument for Zillow to do their own mortgage lending sounds logical. A traditional home sale results in a 6% fee paid to the realtor. On the other hand, the typical iBuyer charges a seller fee of around 7-9%. However, if Zillow earns an additional 3% by attaching the mortgage, they can decrease their seller fee to be right in line with, or even cheaper than, the traditional realtor model. Home buyers have to get a mortgage anyway, so they shouldn’t care too much if it’s through Zillow—as long as the rates are competitive.

The combination of lower customer acquisition costs and increased monetization per customer could potentially be deadly. If both come to fruition, Zillow can underprice other iBuyers on their seller fee and/or pay more per house than their competitors can afford. It’s even possible that Zillow pays full market price for homes and earns enough just from selling the high-quality leads to agents. In this scenario, I’m not sure how others could compete. No one else owns almost 50% of all real estate web traffic that includes home buyers, home sellers, and real estate agents.

However, if Zillow is forced to pay for customers, or their competitors get enough local traffic organically, Zillow may not be able to earn high returns on capital in this new segment. If seller leads don’t pan out, or if those leads simply cannibalize Zillow’s traditional premier agent business, they may monetize customers at the same rate as other iBuyers. In this scenario, Zillow would simply be one of many in a commoditized industry.

How badly are we being ripped off on eyewear? Former industry execs tell all

When he was in the business, in the 1980s and ’90s, Dahan said it cost him between $10 and $16 to manufacture a pair of quality plastic or metal frames. Lenses, he said, might cost about $5 a pair to produce. With fancy coatings, that could boost the price all the way to $15. He said LensCrafters would turn around and charge $99 for completed glasses that cost $20 or $30 to make — and this was well below what many independent opticians charged. Nowadays, he said, those same glasses at LensCrafters might cost hundreds of dollars.

Butler said he recently visited factories in China where many glasses for the U.S. market are manufactured. Improved technology has made prices even lower than what Dahan recalled. “You can get amazingly good frames, with a Warby Parker level of quality, for $4 to $8,” Butler said. “For $15, you can get designer-quality frames, like what you’d get from Prada.” And lenses? “You can buy absolutely first-quality lenses for $1.25 apiece,” Butler said. Yet those same frames and lenses might sell in the United States for $800.

The Netflix of China might just be wishful thinking

Competition to attract new users means that subscription prices aren’t likely to go up any time soon. Pay television service in China isn’t much more expensive than an online video account, making it harder to encourage people to switch, Dai says. Netflix, charging about $10 a month, doesn’t face that challenge because pay TV in the U.S. costs about $90, he says. Over the past two years, revenue per user at iQIYI, the only one of the three publicly traded in the U.S., has fallen about 12.5% due to promotions to drive up subscriptions.

Although Chinese TV series are still much cheaper to make than U.S. shows—production costs for a top series are about $600,000 per hour, compared with $6-10 million for U.S. prime-time content, Daid wrote in his research note—content costs reached 84% of iQIYI’s revenue in 2018. The figure for Netflix is 48%.

Advertising revenue is destined to drop. That’s a function of the way the Chinese platforms work. Unlike Netflix, which has never had advertisements on its site, ad income makes up almost half of the revenue of Chinese online video platforms. Subscribers can skip ads shown to nonsubscribers before a show starts. If 85% of Chinese households signs up for online-video services—Dai’s assumption—only 15% will be left to watch the ads. At iQIYI, subscriptions have already surpassed ads as a source of revenue, accounting for 43% of the total in 2018, compared with 37% for advertising.

Tariff-Man Trump to preside over $100 billion jump in trade gap

The main long-term driver of persistent trade deficits since 1975 has been the gap between the U.S.’s low savings rate and its attractiveness as an investment destination, fueled partly by the dollar’s role as the world’s reserve currency. That in turn leads to a stronger dollar, which in itself helps increase the trade deficit by lowering the real cost of imports and increasing the local-currency cost of American goods in overseas markets.

Investors are losing millions on overpriced Chinese art

The art-purchase-and-lease offer is particularly appealing for people looking for a high-return alternative investment, but find the world of galleries, art fairs and auction houses intimidating. That’s where the model works, it preys on people by speaking to them in a vocabulary they understand and offering to be a trusted guide through this very opaque market, so buyers probably let their guard down,” says Edie Hu, art advisory specialist at Citi Private Bank in Hong Kong. “There is a mystique to the art market and all of a sudden you have someone who brings it down to your level. Nobody from galleries or auction houses talks about return on investment.”

AFG has set up a booth each year at the Asia Contemporary Art Show in Hong Kong alongside other galleries, and has held lucky draws to win a painting, according to d’Angelique, who said she was contacted by phone “in minutes” after filling out an online survey in 2012 to enter the contest.

She said she doesn’t believe her painting was ever rented out and AFG simply overcharged her and paid the lease premium from the sale proceeds. The leasing contract was drawn up between her and AFG, not a corporate renter. She said AFG wouldn’t tell her who would be leasing her painting.

Curated Insights 2019.01.18

10 years since BNSF

“It’s a crazy deal. It’s an insane deal. We looked at Burlington Northern at $75 and I’ll give you the exact calculation we did. You don’t have a high earnings return. They are paying 18 times earnings, but it’s really much worse than that. They report maintenance cap-ex very carefully. They report depreciation and amortization, and they report only about 70% of the maintenance cap-ex.”

One very important fact of this transaction, was his level of conviction. In November 2009, there were a ton of cheap opportunities. Buffett picked BNSF, and paid a 30% premium to gain full ownership. Also, 40% of the total consideration was paid with arguably deeply undervalued BRK shares. So, safe to say he really wanted BNSF. The $34bn paid for BNSF, represented almost 25% of Berkshire’s equity! It was a huge bet, with significant repercussions.

Applying similar numbers, we get to an Enterprise Value of $125bn and an equity value of $105bn for Berkshire´s railroad. Once again, Buffett paid $34bn, took out $31bn in dividends and is left with +$100bn in value…Good job Warren.

So we know returns for this massive investment have been impressive, but let´s get to a number. And the number is…~18%. That is massive for an investment many thought at the time would produce mediocre returns. Remember many experts thought he was overpaying for a capital-intensive, regulated and cyclical business.

18% is 1.5x the return of the S&P 500 during a bull market. But it gets better…At the time of the acquisition, Berkshire already owned ~20% of BNSF stock…so he didn´t have to pay the takeout premium on 100% of the shares outstanding. In reality, he had to pay ~$26bn for the shares he didn´t own. Also, Berkshire employed a bit of leverage to fund the acquisition. The company issued $8bn in bonds, so we get, leveraged returns. If we take into account the leverage and the shares of BNSF Berkshire already owned, then the return on the equity would go…way up. But I think we get the point.

Fund manager: Why Amazon could double

The market is not correctly conceptualizing normalized profitability. It seems that the market views AMZN’s profitability primarily through a legacy e-commerce lens, viewing AMZN as a single-digit-margin business. Piecing apart the business, I think this is wrong. First, AMZN has not known the meaning of the word “operating leverage” for the past 10 years, but it is showing through recently with beautiful impact. In Q3 18, fulfillment as a percentage of sales actually declined for the first time time in five years (having gone from 8.5% in 2010 to 15% of sales in 2018). This is a nascent signal, but suggests that the fulfillment infrastructure expansion is nearing its final stages. There are supplementary data points to support this notion, including the slowing in new DCs and headcount. As a result of this operating leverage, operating margins went from 0.8% in Q3 17 to 6.6% in Q3 18, with incremental margins of 26%. Second, there is a real mix shift going on at AMZN that benefits GMs and fundamentally changes the OM outlook for the combined business. Core e-commerce (lower margin) grew revenue only 10% in Q3, but third party seller services grew 31% and AWS grew 46%. As a result of this positive mix shift, gross margins went from 37% Q3 17 to 41.7% in Q3 18, with incremental gross margins coming in at 57.5%. Amazon effectively has a powerful combination of mix-driven GM expansion and operating leverage driven OM expansion in play here, and my view is that this dynamic will hold for at least a number of years to come.

PayPal quietly took over the checkout button

In 2013, PayPal bought Braintree Payment Solutions LLC, which processes the credit card transactions on the mobile apps of Uber, Airbnb, StubHub, and thousands of smaller businesses. The acquisition brought in an influx of programmers and designers, as well as Venmo, which Braintree had acquired the year before. Venmo is a way to quickly settle small debts between friends: a dinner check, a get-well present for a colleague. With Venmo, informal financial interactions formerly governed by social norms about reciprocity, forgiveness, and passive-aggressive hinting could be easily recorded and quickly paid. (“I only have a twenty” is no longer a viable excuse.) You could even “bill” your friends. The app—complete with a feed of the payments your friends have made to each other—has proved enormously popular with millennials.

Over the next six months, Schulman negotiated similar partnerships with Mastercard and Citibank, committing to make it as effortless as possible for customers to use Citibank-issued credit cards and Mastercard’s network. “When PayPal first spun out of EBay, there was a lot of competition and a lot of negative sentiment,” says Heath Terry, an analyst who covers the industry for Goldman Sachs Group Inc. “Basically, in 18 months on the job, Dan was able to completely change that narrative.” As with the Visa deal, PayPal was forgoing some profit but placating powerful and formerly antagonistic payments incumbents. Citi and Mastercard—along with Google, Apple, Amazon, and Samsung, each of which has an eponymous “pay” product—began steering customers to link their accounts with PayPal, seeing it not as a competitor but as a driver of transactions and the fees they generate. In short, as a pal.

The result has been a surge in growth. “It took us 14 years to go from 50 million subscribers to 250 million,” Schulman says. “I mean, it’s impressive, but it’s a long time. We went from 200 million to 250 million in about 18 months,” tripling the rate at which the company added users, or what it calls “net new actives.” PayPal’s stock is up more than 100 percent since the start of 2017. However, PayPal’s most impressive statistic may be its conversion rate. People who design online and mobile shopping apps are obsessed with smoothing and shortening the path from idle browsing to purchase—humans are acquisitive and impulsive creatures, but they’re also easily distracted and bad at remembering their credit card numbers. Too many options hurts conversion, and so does having to type out stuff or wait for a page to load. PayPal’s conversion rate is lights-out: Eighty-nine percent of the time a customer gets to its checkout page, he makes the purchase. For other online credit and debit card transactions, that number sits at about 50 percent.

This differential was cited by the hedge fund Third Point in an investor letter last July: “We see parallels between PayPal and other best-in-class internet platforms like Netflix and Amazon,” it read. It applauded PayPal’s $2.2 billion purchase in May of IZettle, a Swedish payments processor known as the “Square of Europe.” The praise was particularly striking coming from Third Point, whose billionaire founder Dan Loeb, like Icahn, is better known for publicly excoriating the leadership of the companies in which he invests. Built into PayPal’s high share price is the expectation that the company will figure out a way to turn Venmo’s popularity into profit. Third Point’s letter predicted that the app will be contributing $1 billion in additional annual revenue within three years. Disagreements over how to do that, or how much to even try, have led to the departures of two Venmo heads in two years. Employees who have left in recent months describe mounting mutual frustration. According to multiple people familiar with the company’s finances, the app is still losing hundreds of millions of dollars annually. In an interview after the announcement of Venmo’s latest leadership change in late September, Schulman’s deputy, PayPal Chief Operating Officer Bill Ready, downplayed any suggestion of turmoil. “Any startup that goes through rapid growth is going to experience this,” he says. “You evolve, and you have to bring in different skill sets for each stage of the journey.”

Cancer deaths decline 27% over 25 years

Deaths from cancer dropped 27% over a quarter century, meaning an estimated 2.6 million fewer people died of the disease during that period, according to a new report from researchers at the American Cancer Society.

For most of the 20th century, overall cancer deaths rose, driven mainly by men dying from lung cancer, researchers noted. But since the peak in 1991, the death rate has steadily dropped 1.5% a year through 2016, primarily because of long-running efforts to reduce smoking, as well as advances in detection and treatment of cancer at earlier stages, when prognosis for recovery is generally better.

Curated Insights 2018.12.21

Investing ideas that changed my life

If something has a chance of either destroying you or making you very wealthy and you don’t know how to measure what that chance is, it’s understandable that people default to high levels of credulity.

You can’t believe in risk without also believing in luck, because they are fundamentally the same thing—an acknowledgment that you are one person in a 7 billion player game, and the accidental impact of other people’s actions can be more consequential than your own. But the path of least resistance is to be keenly aware of risk when it affects you, and oblivious to luck when it helps you. Investors adjust returns for risk; never for luck. Companies disclose known risks in their annual reports; lucky breaks are rarely mentioned. The danger is that experiencing risk reduces confidence when it should merely highlight reality, which can make future decisions more conservative than they ought to be. Luck increases confidence without increasing ability, which makes people double down with less room for error than before. Realizing that luck and risk are ever-present and normal makes you accept that not everything is in your control, which is the only way to identify whatever is in your control.

If you think the world is all art, you’ll miss how much stuff is too complicated to think about intuitively. But if you think the world is all science, you’ll miss how much people like to take shortcuts, believe only what they want to believe, and have to deal with stuff that is too complicated for them to summarize in a statistic. Another way to think about this: Investing is not physics, which is guided by cold, immutable laws. It’s like biology, guided by the messy mutations and accidents of evolution, constantly adapting and sometimes defying logic.

“How long will this remain important given my strategy and time horizon?”


The dynamics of network effects

So how can entrepreneurs and founders navigate this era of seemingly diminishing network effects? The trick is to know what your network effects look like today, but also project how they’ll evolve over time. To that end, you’ll need to understand three aspects of your company and how they could change going forward: 1) your value proposition, 2) your users/inventory, and 3) your competitive ecosystem. Otherwise you could get caught flat-footed, claiming that network effects are dead.

Early on, more friends in Frank groups meant more demand and more liquidity, which created a bigger incentive for people to join those groups. But once a group had more than 7 people, they became less likely to lend or borrow: turns out people only have ~7 friends/family members they have that level of trust with! The network effects in this case went from positive to negative as an individual’s network outgrew the value proposition. This pattern has also held true for a number of other highly social products.

Platforms/marketplaces with more differentiated inventory have stronger and longer-lasting network effects, because they have a diversity of inventory that suits the unique preferences of customers (while maintaining just-enough substitutability across that inventory as well). For example, AirBnB can show users every iteration of lodging from $225-$325/night in Los Angeles, which overlaps with someone else’s search for something that costs $150-$250 and has a both a balcony and a hot tub. The platform is therefore more valuable on both sides of the marketplace than a site that just shows a commoditized set of standard and executive rooms. The network effects remain strong not only because it reaches a base level of liquidity across all these different types of inventory (making them valuable to more users), but because it also continues to see increasing returns with new supply.

When you forecast out your network effects — and more importantly, your growth strategy for acquiring and engaging more users — you will need to pay attention to the incremental users you’re likely to attract. Are they network “contaminants”, “neutrals”, or “contributors”? For a social network, adding a troll that disengages other users is a pollutant who removes value. Adding a lurker is neutral since that person doesn’t add or subtract any value from the network. Adding a great content producer contributes an enormous amount of value to the network. So, making sure to incent the users you want while disincenting the ones you don’t want, is key. This is why most great platforms also invest heavily in curation mechanisms to screen and remove bad inventory/users (e.g., Wikipedia’s editors, Airbnb’s reviews/onboarding, etc.). Unfortunately, these screening mechanisms don’t always work and sometimes the cost of finding strong contributors becomes very high, so the calculus of growth relative to cost matters a lot here.

While network effects businesses tend to be more defensible at scale, they are not immune to competition. But for these types of businesses it’s not just a matter of figuring out who your direct competitors are — you also need to think about the network overlap. If someone else has a similar network to yours, there’s always existential risk they’ll move into your market. Because they have a similar network already, they’ll more easily be able to enter your space (Instagram’s foray into Snapchat-like disposable “Stories” is a good example of this). This is also true where the competition may already have registered a superset of your network (e.g., DoorDash and Uber Eats; Didi and Uber in China).

The increasing speed of product iteration, the pace at which networks can scale, and the ease with which competitors can get started has therefore dramatically changed how we project network effects in businesses. Instead of winner-take-all markets where early movers may have once had a seemingly lasting advantage, network effects change more quickly than ever. Especially where specific factors — an asymptotic value proposition, network overlap, increasing number of contaminants, etc. — can lower the platform’s ability to generate a sustainable network effect in the future.

How much is social media worth? Estimating the value of Facebook by paying users to stop using it

As noted previously, Facebook reached a market capitalization of $542 billion in May 2018. At 2.20 billion active users in March 2018, this suggests a value to investors of almost $250 per user, which is less than one fourth of the annual value of Facebook access from any of our samples. This reinforces the idea that the vast majority of benefits of new inventions go not to the inventors but to the users. Further, our results provide evidence that online services can provide tremendous value to society even if their contribution to GDP is minimal. If the billions of people who use Facebook and other free online services derive anything close to $1000 per year in benefits, the productivity slowdown cited by Solow and others may not be reflected in a slowdown in the growth rate of welfare measures like consumer surplus. Many observers have commented on the difficulties of measuring productivity growth in great technological change. While our current study does not offer a solution that can be broadly applied to address this challenge, it does present a methodology and results that provide important insight into the scale of the issue when considering the online revolution of our current era.

Concerns about data privacy, such as Cambridge Analytica’s alleged problematic handling of users’ private information, which are thought to have been used to influence the 2016 United States presidential election, only underscore the value Facebook’s users must derive from the service. Despite the parade of negative publicity surrounding the Cambridge Analytica revelations in mid-March 2018, Facebook added 70 million users between the end of 2017 and March 31, 2018. This implies the value users derive from the social network more than offsets the privacy concerns.


Alibaba stock poised to return 200%, advisor says

Alibaba has a unique business model where it operates solely as a platform, rather than a middle man. The company doesn’t have to purchase inventory, provide logistics, or distribute product – it simply collects fees from merchants for advertising and commissions for completed transactions. This asset light model has allowed BABA to compound earnings more than 43% per year for the last 5 years with very little incremental capital.

The GMV for BABA in the last twelve months was a staggering $4.8 trillion yuan, or $768B USD. This towers over Amazon’s $186B or Walmart’s $495B. GMV is nearly 7% of the GDP of China. In the last 5 years GMV has compounded at an annual growth rate of 29% per year.

Core Commerce is the largest and most profitable division of BABA representing 71% of total revenue and 100% of owner earnings. This division generates revenue by selling advertising to merchants and collecting commissions ranging from 0.3% to 5.0% on sales that occur across BABA’s e-commerce platforms. In the last 5 years revenue from the Core Commerce division has compounded at a rate of 43% per year.

Cloud Computing provides individuals, merchants, and businesses across China online access to the vast computing resources of BABA’s datacenters. Alibaba Cloud offers a complete suite of cloud services, including elastic computing, database, storage, network virtualization services, large scale computing, security, management and application services, big data analytics, and more. Alibaba Cloud has grown at an average pace of more than 100% in the last 5 years. While the business currently does not generate owner earnings due to the aggressive investment in market share, we are confident that the division will be highly profitable in the future.

Digital Media & Entertainment offers an online platform, Youku, where users can watch TV shows, movies, and other content. It is similar to the business model of Netflix, where revenue is generated by selling subscriptions and advertising. While both revenue and daily average subscriber growth has been impressive averaging more than 100% per year for the last 3 years, the business loses money annually due to the high cost of purchasing content. Unlike Alibaba Cloud, which we are confident will be profitable based on comparisons to AWS and Google Cloud, we are less confident in the future profitability of Youku. Comparable companies, like iQiyi and Netflix, have never generated positive cash flow for owners and the path to a successful business model is not presently clear. We are hopeful that this business division will be spun off as a standalone business in the upcoming years.

“As a result of our broad value propositions to consumers, we have seen increased engagement over time. The longer consumers have been with us, the larger numbers of orders they tend to place, across a more diverse range of product categories, and the more they tend to spend on our China retail marketplaces. For example, in the twelve months ended March 31, 2018, consumers who have been with us for approximately five years placed an average of 132 orders in 23 product categories with average spending of approximately RMB12,000 in terms of GMV, whereas consumers who have been with us for approximately one year placed an average of 27 orders in 6 product categories with average spending of approximately RMB3,000 in terms of GMV. In the twelve months ended March 31, 2018, the average annual active consumer on our China retail marketplaces placed 90 orders in 16 product categories with average spending of approximately RMB9,000 in terms of GMV.”

The business case for serverless

The case for serverless starts with a simple premise: if the fastest startup in a given market is going to win, then the most important thing is to maintain or increase development velocity over time. This may sound obvious, but very, very few startups state maintaining or increasing development velocity as an explicit goal. “Development velocity,” to be specific, means the speed at which you can deliver an additional unit of value to a customer. Of course, an additional unit of customer value can be delivered either by shipping more value to existing customers, or by shipping existing value—that is, existing features—to new customers.

Whereas a ‘normal’ cloud server like AWS’s EC2 offering had to be provisioned in advance and was billed by the hour regardless of whether or not it was used, AWS Lambda was provisioned instantly, on demand, and was billed only per request. Lambda is astonishingly cheap: $0.0000002 per request plus $0.00001667 per gigabyte-second of compute. And while users have to increase their server size if they hit a capacity constraint on EC2, Lambda will scale more or less infinitely to accommodate load — without any manual intervention. And, if an EC2 instance goes down, the developer is responsible for diagnosing the problem and getting it back online, whereas if a Lambda dies another Lambda can just take its place.

Although Lambda—and equivalent services like Azure Functions or Google Cloud Functions—is incredibly attractive from a cost and capacity standpoint, the truth is that saving money and preparing for scale are very poor reasons for a startup to adopt a given technology. Few startups fail as a result of spending too much money on servers or from failing to scale to meet customer demand — in fact, optimizing for either of these things is a form of premature scaling, and premature scaling on one or many dimensions (hiring, marketing, sales, product features, and even hierarchy/titles) is the primary cause of death for the vast majority of startups. In other words, prematurely optimizing for cost, scale, or uptime is an anti-pattern.

Herein lies the magic of using managed services. Startups get the beneficial use of the provider’s code as an asset without holding that code debt on their “technical balance sheet.” Instead, the code sits on the provider’s balance sheet, and the provider’s engineers are tasked with maintaining, improving, and documenting that code. In other words, startups get code that is self-maintaining, self-improving, and self-documenting—the equivalent of hiring a first-rate engineering team dedicated to a non-core part of the codebase—for free. Or, more accurately, at a predictable per-use cost. Contrast this with using a managed service like Cognito or Auth0. On day one, perhaps it doesn’t have all of the features on a startup’s wish list. The difference is that the provider has a team of engineers and product managers whose sole task is to ship improvements to this service day in and day out. Their exciting core product is another company’s would-be redheaded stepchild.

One day, complexity will grow past a breaking point and development velocity will begin to decline irreversibly, and so the ultimate job of the founder is to push that day off as long as humanly possible. The best way to do that is to keep your ball of mud to the minimum possible size— serverless is the most powerful tool ever developed to do exactly that.

Huawei ban casts shadow over $100bn economic sphere

Huawei reported sales of 603.62 billion yuan ($87.4 billion at current rates) last year — not far off from Microsoft and Google parent Alphabet, although less than half as much as Apple. Its two biggest telecom equipment rivals, Nokia and Ericsson, had net sales of 23.1 billion euros ($26.1 billion) and 201.3 billion krona ($22.2 billion), respectively, last year. It ranks as the world’s top seller of base stations for wireless networks with a 28% share, the No. 2 maker of smartphones and routers, and the fourth-largest server manufacturer.

Privately owned Huawei spent $14 billion on outside procurement of semiconductors alone last year. Much of this came from American companies, with $1.8 billion in purchases from Qualcomm and $700 million from Intel, according to Chinese media.

Hikvision, which is more than 40% controlled by state-owned companies, is the world’s leading maker of security cameras and offers image-analysis technology powered by artificial intelligence. Privately run Hytera boasts world-leading production capacity for specialized wireless communications technology used by police and the military. Hikvision and Hytera in recent years have both acquired foreign peers — something that Beijing normally puts strict limits on — to expand their technological capabilities and overseas presence.

LVMH inks $2.6 billion deal to buy ‘21’ club operator Belmond

The acquisition is one of LVMH founder Bernard Arnault’s biggest, rivaling the purchases of Bulgari and Loro Piana. It comes as consumers shift spending toward trips, health clubs, restaurants and entertainment and interest in shopping malls dwindles.

The acquisition addresses another challenge facing LVMH and rivals Kering SA and Richemont. They’ve snapped up so many of the world’s leading brands that there are few prominent leather and couture labels left to buy. The Louis Vuitton owner, formed through a merger with Champagne and cognac maker Moet Hennessy, has already expanded into perfume, watches, jewelry and cosmetics retail. Prominent remaining independents like Chanel and Hermes have shown little inclination to sell.

The deal will expand the French company’s high-end hospitality offerings. LVMH formed a hotel management group in 2010 to oversee its operations in the sector, which include properties under the Cheval Blanc name in locations like the Courchevel ski resort in the French Alps. LVMH’s Bulgari jewelry brand has six hotels, including one in Shanghai that opened in July. It plans to open hotels in Moscow, Paris and Tokyo in the next four years.

Belmond, which used to be known as Orient-Express Hotels, owns or has stakes in more than 30 high-end hotels around the world, from St. Petersburg to Anguilla in the Caribbean. In addition to the ‘21’ Club power restaurant in Manhattan, its stable of luxury properties includes a cruise line in France, a London-to-Venice train line and safari camps in Botswana.

What straight-A students get wrong

The evidence is clear: Academic excellence is not a strong predictor of career excellence. Across industries, research shows that the correlation between grades and job performance is modest in the first year after college and trivial within a handful of years. For example, at Google, once employees are two or three years out of college, their grades have no bearing on their performance.

Academic grades rarely assess qualities like creativity, leadership and teamwork skills, or social, emotional and political intelligence. Yes, straight-A students master cramming information and regurgitating it on exams. But career success is rarely about finding the right solution to a problem — it’s more about finding the right problem to solve.

Getting straight A’s requires conformity. Having an influential career demands originality. In a study of students who graduated at the top of their class, the education researcher Karen Arnold found that although they usually had successful careers, they rarely reached the upper echelons. “Valedictorians aren’t likely to be the future’s visionaries,” Dr. Arnold explained. “They typically settle into the system instead of shaking it up.”

If your goal is to graduate without a blemish on your transcript, you end up taking easier classes and staying within your comfort zone. If you’re willing to tolerate the occasional B, you can learn to program in Python while struggling to decipher “Finnegans Wake.” You gain experience coping with failures and setbacks, which builds resilience.

Employers: Make it clear you value skills over straight A’s. Some recruiters are already on board: In a 2003 study of over 500 job postings, nearly 15 percent of recruiters actively selected against students with high G.P.A.s (perhaps questioning their priorities and life skills), while more than 40 percent put no weight on grades in initial screening. Straight-A students: Recognize that underachieving in school can prepare you to overachieve in life. So maybe it’s time to apply your grit to a new goal — getting at least one B before you graduate.

Curated Insights 2018.12.14

The Facebook Fed

I think a good analogy is that Facebook is the Federal Reserve of web publishing. It can turn its dial and blast millions of visitors to numerous publishers, allowing everyone to have more eyeballs to sell to and more rising traffic numbers with which to attract investment. Facebook turning on the traffic fire hose is like loose monetary policy that stimulates the economy for everyone.

Of course, Facebook could tighten policy, pulling traffic (liquidity) and leaving weaker players parched. When the Fed tightens policy, shaky borrowers who depend on ample lending are hit hardest. When Facebook tightens policy, second-tier publishers that totally rely on Facebook are hit hardest.

Digital divide is wider than we think, study says

Over all, Microsoft concluded that 162.8 million people do not use the internet at broadband speeds, while the F.C.C. says broadband is not available to 24.7 million Americans. The discrepancy is particularly stark in rural areas. In Ferry County, for example, Microsoft estimates that only 2 percent of people use broadband service, versus the 100 percent the federal government says have access to the service.

The hardest problem in finance

But here’s the catch, this table assumes you get this rate of return year after year after year. The real world is not so accommodating. The table above shows that you can earn 4% a year for 34 years before running out of money, but let’s look at what happens if a nasty bear market were to arrive as soon as you retire. The chart below shows one way in which an investor can arrive at a 4% CAGR over a 30 year period.

The danger of assuming compound annual growth rates when making long term projections can be seen in the chart below. The black line shows that spending a constant $40k annually, using the returns from the previous chart, an investor would run out of money in the 19th year. Spending 4% and assuming a 2% inflation rate, a more realistic assumption, an investor would run out of money in just 15 years. Side note, if the returns above were to happen in reverse, in other words the bear market comes at the end of the period, an investor with the same spending would be left with $1.3 million.

Curated Insights 2018.12.07

The money and math behind our newsletter headlines

That means that the winning headline results in 4,620 incremental opens per newsletter. Over the course of a month, that is 115,000+ incremental opens. If we apply a conservative estimate based on some of our data from 2015 of how many of those incremental opens try the CB Insights free product (0.09%) and that only 1% of those trials buy a subscription, we’re looking at nearly $625,000 of incremental revenue.

Facebook is undervalued

The result of billions of readers providing free content for each other is a massive network effect and a business that can serve each incremental ad at a very low marginal cost. The company’s 85% gross margin leaves a lot of meat on the bone that the company can spend on hiring new engineers and developing new technology that is needed to maintain and grow the business. But even after paying the engineers, growing the headcount, spending over $9 billion on R&D, and paying the tax bill, shareholders are still left with around 40 cents of profit for each dollar of revenue. Facebook reinvests these earnings into data centers, technology, and the occasional acquisition, but even so, the cash in the till has been piling up, and now exceeds $40 billion and counting ($14 per share). Facebook has spent $10 billion on buybacks in the last year, and this will likely accelerate in the coming years.

Facebook’s business is still growing fast (33% revenue growth last quarter), and despite the company’s large size, the runway is still long. Benedict Evans, a partner at the VC firm Andreessen Horowitz, recently pointed out that roughly $1 trillion is spent each year by businesses who are trying to reach customers who are asking the question: “What should I buy?”. Facebook has roughly 5% of this market, which I think is a share that will inevitably rise over the coming years as advertising dollars continue to shift from traditional media to the much higher ROI advertising platforms like Google, Facebook, and Amazon.

A strong network leads to Facebook grabbing a much greater share of the $1 trillion (and growing) global ad/marketing industry. Revenue from ads alone could easily be twice the current size, which means that Facebook is a $100 billion business before counting any of the possible upside from payments, messaging, or any of the other potential business lines that the company could develop on the back of its large network effect.


Accelerator demand should grow ten-fold according to top 500 supercomputers

If the data center market as a whole were to follow in the footsteps of HPC, accelerators could displace Intel CPUs as the workhorse of enterprise computing.

If processors were to grow to 50% of total server component costs, with accelerators capturing 70% of processors, as is the case in the HPC market today, the market for accelerators could scale from $4 billion1 today to $24 billion. Currently, the size of the computer server market is $80 billion globally, according to IDC. If manufacturers take a 15% cut, then $68 billion accrues to component suppliers such as Intel, Micron, and Nvidia. Today we estimate that processors account for roughly 35% of server component costs, the balance allocated to memory, storage, and networking. With HPC and AI, servers are evolving toward higher compute configurations, pushing processors and accelerators to 80% of total component costs.

As shown by the latest IDC data above, the server market as a whole continues to grow, driven primarily by higher average selling prices (ASPs). With denser configurations, server ASPs could climb from today’s price of $8,000 to $10,000. Even at the current volume of 10 million units per year, that would grow the server market 25% from $80 to $100 billion, pushing the accelerator total addressable market to $35 billion.

Today, the accelerator market is dominated by Nvidia’s data center products, which we estimate will generate $3.2 billion of revenue in 2018. Nvidia estimates that its data center business has a total addressable market of $50 billion—a figure larger than Intel’s data center business, which seems difficult to reconcile. That said, as the latest data from IDC and Top 500 shows, the server market is undergoing a fundamental shift. The decay of Moore’s Law has increased total server spend as compute intensive workloads migrate from CPUs to specialized processors. If CPUs and accelerators were to swap places in the data center, as they did in HPC, the accelerator market would approach Nvidia’s estimate, implying a 10x increase over the next five to ten years.

Artificial intelligence is giving rise to fake fingerprints. Here’s why you should be worried

In the new paper, the researchers used neural networks—the foundational software for data training—to create convincing looking digital fingerprints that performed even better than the images used in the earlier study. Not only did the fake fingerprints look real, they contained hidden properties undetectable by the human eye that could confuse some fingerprint scanners.

Julian Togelius, one of the paper’s authors and an NYU associate computer science professor, said the team created the fake fingerprints, dubbed DeepMasterPrints, using a variant of neural network technology called “generative adversarial networks (GANs),” which he said “have taken the AI world by storm for the last two years.”

Daniel Kahneman: Your intuition is wrong, unless these 3 conditions are met

There are three conditions that need to be met in order to trust one’s intuition. The first is that there has to be some regularity in the world that someone can pick up and learn. “So, chess players certainly have it. Married people certainly have it,” Kahnemen explained. However, he added, people who pick stocks in the stock market do not have it. “Because, the stock market is not sufficiently regular to support developing that kind of expert intuition,” he explained. The second condition for accurate intuition is “a lot of practice,” according to Kahneman. And the third condition is immediate feedback. Kahneman said that “you have to know almost immediately whether you got it right or got it wrong.”

The 80-hour workweek

Every year on Wall Street, first-year analysts who were once courted by college recruiters with lines about how they would be given meaningful, creative work and the chance to learn from top executives are shown the harsh truth: they are Excel grunts whose work is often meaningless not just in the cosmic sense, but in the sense of being seen by nobody and utilized for no productive purpose. Some of the hundred-page pitch books analysts spend their late-night hours fact-checking in painstaking detail are simply thrown away after being given a quick skim by a client. In other cases, the client doesn’t read the deliverables at all, and the analysts’ work is literally garbage.

Most days that winter, he had worked the “banker nine-to-five”—getting to work at 9:00 a.m. and staying until 5:00 a.m. the next morning, at which point he’d trudge back to his Murray Hill apartment, sleep for three or four hours, and do it all over again. Even the money he was making wasn’t cheering him up. Ricardo had once made the mistake of calculating what his hourly wage would be, given his salary and a conservative estimate of his year-end bonus. The result—which he estimated was something like $16 an hour, after taxes—was much more than minimum wage, but not nearly enough for Ricardo to be able to justify the punishment he’d been taking.

The question of in office hours versus out of office hours is a good one in thinking about a career in the finance industry. I knew basically nothing when I came into finance so a massive amount of my learning was done on my own after hours.

Curated Insights 2018.11.30

What’s next for marketplace startups? Reinventing the $10 trillion service economy, that’s what.

The service economy lags behind: while services make up 69% of national consumer spending, the Bureau of Economic Analysis estimated that just 7% of services were primarily digital, meaning they utilized internet to conduct transactions.

In the a16z portfolio, Honor is building a managed marketplace for in-home care, and interviews and screens every care professional before they are onboarded and provides new customers with a Care Advisor to design a personalized care plan. Opendoor is a managed marketplace that creates a radically different experience for buying and selling a home. When a customer wants to sell their home, Opendoor actually buys the home, performs maintenance, markets the home, and finds the next buyer. Contrast this with the traditional experience of selling a home, where there is the hassle of repairs, listing, showings, and potentially months of uncertainty.

Managed marketplaces like Honor and Opendoor take on steps of the value chain that platforms traditionally left to customers or providers, such as vetting supply. Customers place their trust in the platform, rather than the counterparty of the transaction. To compensate for heavier operational costs, it’s common for managed marketplaces to actually dictate pricing for services and charge a higher take rate than less-managed marketplace models.

The last twenty years saw the explosion of a number of services coming online, from transportation to food delivery to home services, as well as an evolution of marketplace models from listings to full-stack, managed marketplaces. The next twenty years will be about the harder opportunities that software hasn’t yet infiltrated–those filled with technological, operational, and regulatory hurdles–where there is room to have massive impact on the quality and convenience of consumers’ everyday lives.

The services sector represents two-thirds of US consumer spending and employs 80% of the workforce. The companies that reinvent various service categories can improve both consumers’ and professionals’ lives–by creating more jobs and income, providing more flexible work arrangements, and improving consumer access and lowering cost.

Country stock markets as a percent of world

Keyence’s miraculous margins

The outsourcing reduces capital expenditure costs, and the associated depreciation, as there’s no machinery to purchase. It is also said to help Keyence to retain its valuable intellectual property. Suppliers, according to Morten Paulsen, Head of Research at CLSA Japan, have no visibility on how the respective pieces of the product puzzle fit together.

But Keyence are not the only business to run a “fabless” model. Apple, perhaps the most successful consumer brand of all time, outsources the creation of its iPhone to Taiwanese Foxconn. It reported operating margins of 26 per cent last quarter. Similarly, semiconductor designers such as Nvidia, Broadcom and Qualcomm also outsource to businesses like Taiwan Semiconductor. Their margins tend to range from 20 per cent to 40 per cent.

Keyence is also excellent at leveraging its suppliers, which it does “in a cleverer way than any other company I’ve seen”, he told us. Indeed, Keyence often has multiple suppliers manufacturing the same part, which stops one raising prices in fear of losing orders to competitors. Further to this, Keyence develops some of its manufacturing processes in house, then trains the suppliers, which means it can switch suppliers with greater ease than most if it begins to get strong armed, Paulsen argues.

What about its products? To its credit, Keyence has positioned itself right at the forefront of several key trends in an era of increasing factory automation, such as sensors which detect infinitesimal assembly-line mistakes. Customers, such as automakers — which make up roughly 25 per cent of its sales, according to Paulsen — are happy to pay top dollar for products that pay for themselves in 2 years, giving Keyence some degree of pricing power.

The reason for achieving high profitability is to maximise customer’s evaluation of products with high value added — that is, for customers, “I do not think it is expensive” and “I think it is cheap if it [our problem] can be solved” . . . As we explore the potential needs of our customers and develop them [the products] in advance, about 70 per cent of the new products of Keyence are the industry’s first and world’s first product as a result. Even in terms of management, we concentrate resources on product planning and design . . . we are trained to not only sell goods but also propose ideas that can solve customer’s problems.

Amazon, with little fanfare, emerges as an advertising giant

“The online retailer has ascended to the No. 3 spot in the U.S. digital ad market behind the dominant players, Alphabet Inc.’s Google and Facebook Inc. Though Amazon has just 4% of the market now, the company is expanding its avenues for marketers and hiring aggressively for its ad unit.

Amazon’s ad revenue is on pace to double this year, to $5.83 billion, according to eMarketer. Its ad sales are expected to jump $28.4 billion over the next five years, according to Cowen & Co.—more than the combined increases in ad revenue for all television networks globally, according to figures from media-buyer GroupM.”

Amazon’s ad business now contributes to gross profit and is expected to generate more income than its cloud business—which currently provides the bulk of its profits—as soon as 2021, according to Piper Jaffray analysts.

Amazon is expected to collect 15 cents of each new dollar spent on U.S. digital ads in 2020, up from 5 cents last year, according to an analysis of data from research firm eMarketer.

Why doctors hate their computers

This, I discovered, was the real reason the upgrade cost $1.6 billion. The software costs were under a hundred million dollars. The bulk of the expenses came from lost patient revenues and all the tech-support personnel and other people needed during the implementation phase.

Optimize your programming decisions for the 95%, not the 5%

Without having a deep understanding of what you’re developing and have put in the time to come up with good abstractions based on real experience, you’re just shooting in the dark hoping your generic user system works for all cases when you haven’t even programmed it yet for 1 use case. How is that even possible to do?

When you blindly follow what Google and other massive companies are doing, you’re optimizing for the 5% in a slightly different way. Instead of just getting your app up and running and seeing how it goes, you try to make decisions so that your application can be developed by 100 different teams sprawling across 5,000 developers. Meanwhile it’s just you developing the app by yourself in nearly all cases for new projects.

As soon as you start trying to make it work for a real application, or more specifically, your application, it all falls apart until you spend the time and really learn what it takes to scale an application (which is more than just picking tools). The companies that created these tools have put in the time over the years and have that knowledge, but that knowledge is specific to their application.

Premature optimization is the root of all evil (or at least most of it) in programming.

Optimizing for the 5% is a type of premature optimization. Maybe not so much for your development environment choices, but certainly for the other cases. Base your decisions on optimizing for the 95%, keep it simple and see how it goes. In other words, optimize when you really need to not because of “what if”.

Curated Insights 2018.09.28

The problem with compounders

What is most important is you find a business with the correct business model that can grow sales. The sales engine of the company is the most important aspect, and also the one most overlooked by investors and analysts. Sure, cost structure matters, and business model matters as does “capital allocation”, which is what they do with the tiny bit of leftover money, but what matters most is sales.
Herein lies a problem. How do you determine that a small company with the correct business model will grow sales at a high rate? The only way to do that is to visit the company and talk to management. But talking to management isn’t enough. You need to sit down and discuss their sales strategy, understand who their employees are and evaluate the ability to execute on their plan.

This is clearly a dark spot for most analysts and investors. How do you determine if the sales manager is selling you, or knows what they’re talking about? Especially if there isn’t much in the way of results to look at? I believe it’s possible, but instead of having a solid background in financial analysis you need to have sales experience and understand the sales process. Instead of reading the newest book on investing strategies your bookshelf should be full of books on pricing, call strategies, how to approach demos, and prospecting. It’s also worth remembering that enterprise sales is a different beast from consumer sales, or small business sales.

When you start to put all the pieces of this puzzle together it starts to become more apparent why everyone didn’t invest in Starbucks, or Microsoft, or Oracle when they were tiny companies. To truly catch a compounder when they’re in infancy you need a set of skills that few investors possess. It’s not impossible to build out that skill set. Understanding this paradox also helps to expose the myth that buying high growth companies is a surefire way to success. Buying high growth companies IS a surefire way to success if you can buy them when they’re small enough and their market is large enough.


Different kinds of smart

Everyone knows the famous marshmallow test, where kids who could delay eating one marshmallow in exchange for two later on ended up better off in life. But the most important part of the test is often overlooked. The kids exercising patience often didn’t do it through sheer will. Most kids will take the first marshmallow if If they sit there and stare at it. The patient ones delayed gratification by distracting themselves. They hid under a desk. Or sang a song. Or played with their shoes. Walter Mischel, the psychologist behind the famous test, later wrote:

The single most important correlate of delay time with youngsters was attention deployment, where the children focused their attention during the delay period: Those who attended to the rewards, thus activating the hot system more, tended to delay for a shorter time than those who focused their attention elsewhere, thus activating the cool system by distracting themselves from the hot spots.

Delayed gratification isn’t about surrounding yourself with temptations and hoping to say no to them. No one is good at that. The smart way to handle long-term thinking is enjoying what you’re doing day to day enough that the terminal rewards don’t constantly cross your mind.


Investors want managers’ stories — Not track records — Data show

Seventy-seven percent of asset managers thought their messages were differentiated from peers, but only 21 percent of consultants believed that managers’ messages varied, according to Chestnut’s research. In addition, 75 percent of consultants who participated in the study, said their number one search criteria was investment process and portfolio construction. Manager narratives in the eVestment database, for example, get 3,000 views each month. Chestnut had 122 institutional investors and consultants participate in the study.

Amazon’s clever machines are moving from the warehouse to headquarters

Going forward, Amazon will need fewer people to manage its retail operations, a decided advantage over rivals like Walmart Inc. and Target Corp., which are both spending heavily just to catch up. “This is why Amazon is the 800-pound gorilla,” says Joel Sutherland, a supply-chain management professor at the University of San Diego. “Nobody else has the resources and expertise to pull all of these emerging technologies together to remove humans from the process as much as possible while making things more reliable and accurate.”

Faith in the technology grew as it improved. Workers were happy to see tedious tasks like managing inventory spreadsheets delegated to machines that did the work more quickly and accurately. “The numbers don’t lie,” Kwon says. “It’s a better model.”

A key turning point came in 2015 when the value of goods sold through the marketplace exceeded those sold by the retail team, the people say. The retail team, which had far more employees, watched its importance fade and money funneled into projects like Amazon Web Services and Alexa. It didn’t help that the marketplace generated twice the operating profit margin of the retail business—10 percent versus 5 percent, according to a person familiar with the company’s finances. In many international markets, the retail team has never turned a profit, the person says.

In annual sales meetings, a team of 15 people overseeing a retail category would see their growth outperformed by one person from the marketplace team, the people say. The lines between the teams began blurring. Amazon retail vendors had once enjoyed such advantages as video and banner advertising and access to daily deals that get millions of hits a day; now marketplace merchants got the same perks. Many brands became more interested in selling on the marketplace, where they—not the Amazon retail team—controlled prices, images and product descriptions.

“Computers know what to buy and when to buy, when to offer a deal and when not to,” says Neil Ackerman, a former Amazon executive who manages the supply chain at Johnson & Johnson. “These algorithms that take in thousands of inputs and are always running smarter than any human.”


Instagram’s CEO

This dynamic, by the way, was very much apparent when Snap IPO’d a year-and-a-half ago; indeed, Snap CEO Evan Spiegel, often cast as the anti-Systrom — the CEO that said “No” to Facebook — arguably had the same flaw. Systrom offloaded the building of a business to Zuckerberg; Spiegel didn’t bother until it was much too late.

Controlling one’s own destiny, though, takes more than product or popularity. It takes money, which is to say it takes building a company, working business model and all. That is why I mark April 9, 2012, as the day yesterday became inevitable. Letting Facebook build the business may have made Systrom and Krieger rich and freed them to focus on product, but it made Zuckerberg the true CEO, and always, inevitably, CEOs call the shots.


Now Facebook needs to worry about the Instagram founders’ next move

Tech companies with non-compete agreements for employees of up to one year rarely enforce them in full—especially in California, where courts have routinely thrown them out or severely restricted the scope of such agreements, Ted Moskovitz, a former SEC lawyer-turned-tech-entrepreneur, tells Barron’s. “California courts are extremely hostile to non-competes, and typically only enforce them where there is some other concern, like theft of trade secrets involved,” Moskovitz says. “California’s economy is highly reliant on innovation and the bringing to market of new ideas.”

The greater issue, he says, is whether Systrom and Krieger are taking proprietary and/or patented intellectual property with them.


Exclusive manager interview on Facebook

Imagine 100 years from today. My great great grandkids will have the ability to see who I was, what I was like, who I spent time with (if I give permission to Facebook to share my account prior to my death…?). This is a wonderful service for future generations. How could a company replicate such a wonderful service? All the photos, memories, comments, stories, and effort that we’ve put into the platform for the last 14 years has created a network and a legacy that I don’t believe will be easy to move or replace. We believe the moat around Facebook is getting wider everyday.

That being said, short-term data shows declines in user numbers for the youngest cohorts. This should be expected. Facebook becomes more interesting for people as they get older. As you age a mature you are posting pictures of your wedding day, your first child, your parents holding grandchildren, etc. You spend time staying in touch and looking at the lives of people that use to be very important in your life, like your brothers or friends from college, old work colleuges, etc. When you’re in high school you live with your family, you don’t have many friends that are scattered across the world, and you’re too cool to stay in touch with Mom and Dad. SnapChat makes way more sense for this young cohort. You can send inappropriate and temporary images as you discover who you are. I wouldn’t expect Facebook to ever really dominate the youngest cohorts, but I do expect that as this cohort matures many of them will spend less time and SnapChat and more time on Facebook. Priorities change overtime and Facebook definitely plays a critical and positive role in the world today.

Sirius XM’s deal to buy Pandora is a win for legacy media

It turns out that costly physical infrastructure and traditional linear programming don’t always doom media companies in their battle against digital upstarts. That’s a particularly relevant point today as Comcast bulks up to continue its battle against Netflix.

Sirius has a sticky business model, in which car buyers predictably turn on the Sirius XM radios that come pre-installed in new cars. We’re at the point where a growing number of used cars are being re-purchased with those same Sirius radios still installed, making used-car buyers a growing market for Sirius. But a satellite radio subscription still can’t match the ease of use or cost of Pandora’s smartphone app, which ranges from free to $10 a month for unlimited music.

In an investor presentation on Monday, Sirius noted that Pandora expands the company’s presence “beyond the vehicle,” while diversifying Sirius’ revenue stream by adding the country’s “largest ad-supported digital audio offering.” Sirius sees opportunity for cross-promotion between its 36 million paying subscribers and Pandora’s 70 million active listeners. The bulk of Pandora’s users are non-paying customers, but the company does have about six million paying subscribers. Sirius can now try to sell its subscription package into Pandora’s large user base.


Blackstone executives have eyes on new prizes

Blackstone has grown five-fold since its initial public offering in 2007, reaching nearly $440 billion in assets, largely on the back of private equity, real estate, hedge funds, and credit. Over the last 12 months, Blackstone has brought in a record $120 billion in investor capital.

Speaking at Blackstone’s Investor Day on September 21, president and COO Jon Gray stressed that Blackstone’s business requires very little capital. Of the $439 billion it manages, only $2 billion represents balance-sheet investments. Instead, it invests the assets of its clients, largely pension funds, endowments, and other institutions. Some of the firm’s future and early-stage initiatives, such as private wealth, involve tapping more mainstream investors.

Insurers are facing increasing regulatory capital requirements and continue to be squeezed by low interest rates. “They have no choice but to move into alternatives and private credit,” said James. Insurance companies, which hold a majority of their assets in fixed income are a natural fit with Blackstone, which is one of the largest originators of credit assets. Blackstone will both manage the assets for insurers like it does for any institution, and buy mature books of business where it takes on the entire balance sheet and manages both liabilities and assets. “This is a larger and more profitable business than simply having accounts to manage. There are hundreds of billions of insurance assets being sold as we speak,” he said.

Ronaldo: Why Juventus gambled €100m on a future payday

There are early signs the bet is paying off. While in secret talks to sign Ronaldo, Juventus increased average season ticket prices by 30 per cent. All 29,300 have been sold. On match day the Juventus stadium superstore is doing a brisk trade in Ronaldo replica shirts, costing up to €154.95 — among the highest prices in Europe. For his home debut, fans travelled from all over the world while television networks spent days trailing his arrival in Turin.

To sign the striker Juventus agreed to pay Real Madrid a €100m fee over two years, a further €5m in payments that will ultimately be paid to clubs that trained him as a young player, and about €12m in fees to his agent, Jorge Mendes. Ronaldo’s four-year contract provides a salary worth more than €50m a year after tax, according to reports. The remuneration package will also allow Juventus to use his “image rights”, so that the player — who earns an estimated $47m a year in personal endorsements — can also be used in Juventus promotional campaigns. Financial services firm KPMG estimates that, including the transfer fee, amortised over the duration of his contract, Juventus will pay around €340m, or €85m a year for Ronaldo’s services.


This 24-Year-Old built a $5 billion hotel startup in five years

Oyo employs hundreds of staffers in the field who evaluate properties on 200 factors, from the quality of mattresses and linens to water temperature. To get a listing, along with a bright red Oyo sign to hang street-side like a seal of good-housekeeping approval, most hoteliers must agree to a makeover that typically takes about a month. Oyo then gets 25 percent of every booking. Rooms usually run between $25 and $85.

Agarwal wouldn’t give sales numbers, but he said the number of transactions has tripled in the last year, with 90 percent coming from repeat travelers — and no money spent on advertising. There are now 10,000 hotels in 160 Indian cities, with more than 125,000 rooms, listed on the site, he said. That’s about 5 percent of India’s total room inventory, according to RedSeer estimates.

China claims more patents than any country—most are worthless

As of last year, more than 91 percent of design patents granted in 2013 had been discarded because people stopped paying to maintain them, according to JZMC Patent and Trademark data compiled for a Bloomberg query. Things aren’t much better for utility models with 61 percent lapsing during the same five-year period, while invention patents had a disposal rate of 37 percent. In comparison, maintenance fees were paid on 85.6 percent of U.S. patents issued in 2013, according to the United States Patent and Trademark Office.


The future of fish farming may be indoors

Bio-security routines that require sanitizing hands and dipping shoes in disinfectant bins minimize the risk of disease and the need for antibiotics that other forms of aquaculture heavily rely on, says Peterson, who has advised Nordic Aquafarms regarding best practices. However, just one employee who fails to complete the process correctly or neglects other basic protocol could contaminate the operation—with pathogens potentially looping through the recirculating system and killing an entire tank of fish. Large-scale companies could guard against this with monitoring equipment that lets them respond quickly to any issues, Peterson says, adding that strict government permits require routine monitoring that would also detect unusual levels of discharge in wastewater.

The real environmental toll of big indoor systems will depend on the capacity of local infrastructure, including the water supply, Timmons says. Recirculating systems can recycle more than 90 percent of tank water but some of it does get lost to evaporation or absorbed in solid waste each day. He calculates that a farm the size of the Belfast facility would (after the initial tank fill) consume about 1.65 billion liters of freshwater per year—roughly equivalent to the water use of about 12,000 people. But he notes even in a town of fewer than 7,000 people, like Belfast, this is within the capacity of the local aquifer—and is dwarfed by the volume of water the farm would recycle each year. In more drought-prone regions indoor aquaculture facilities could release wastewater for irrigating agricultural fields, reducing the water burden, Timmons adds.


Scientists finally crack wheat’s absurdly complex genome

This is already happening. Using the completed genome, the team identified a long-elusive gene (with the super-catchy name of TraesCS3B01G608800) that affects the inner structure of wheat stems. If plants have more copies of the gene, their stems are solid instead of hollow, which makes them resistant to drought and insect pests. By using a diagnostic test that counts the gene, breeders can now efficiently select for solid stems.


Nearly half of cellphone calls will be scams by 2019, report says

Nearly half of all cellphone calls next year will come from scammers, according to First Orion, a company that provides phone carriers and their customers caller ID and call blocking technology.

The Arkansas-based firm projects an explosion of incoming spam calls, marking a leap from 3.7 percent of total calls in 2017 to more than 29 percent this year, to a projected 45 percent by early 2019.

Everything you know about obesity is wrong

According to the Centers for Disease Control and Prevention, nearly 80 percent of adults and about one-third of children now meet the clinical definition of overweight or obese. More Americans live with “extreme obesity“ than with breast cancer, Parkinson’s, Alzheimer’s and HIV put together.


35 years ago today, one man saved us from world-ending nuclear war

Petrov did not report the incoming strike. He and others on his staff concluded that what they were seeing was a false alarm. And it was; the system mistook the sun’s reflection off clouds for a missile. Petrov prevented a nuclear war between the Soviets, who had 35,804 nuclear warheads in 1983, and the US, which had 23,305.

A 1979 report by Congress’s Office of Technology Assessment estimated that a full-scale Soviet assault on the US would kill 35 to 77 percent of the US population — or between 82 million and 180 million people in 1983. The inevitable US counterstrike would kill 20 to 40 percent of the Soviet population, or between 54 million and 108 million people.


Market research tricks

If you ask a question as close as possible to the claim you want to make, and ensure you survey a representative national sample of category users, any national chain in any category will beat competitors that are superior but only regionally available.

As a result of this research and ad campaign, one of Jimmy Dean’s regional competitors actually did its own research, but only in its regional area. The company found that it could beat Jimmy Dean in its region, and made its own ads that said in effect, “Did you really want to eat a breakfast sausage that people in both New York and San Francisco ate? No, you want (our) brand that tastes better to people like you and me here in (their local region).”

And because Taco Bell is pretty much ubiquitous, and enough people everywhere will vote for it because they haven’t found good, authentic Mexican food in their areas, it wins this title. There is no way that local restaurants, or even good regional chains, could compete with the sheer numbers of a national chain.

Curated Insights 2018.09.14

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

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

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

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


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

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

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

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

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

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

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

The global smartphone supply chain needs an upgrade

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

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

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

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

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

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

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

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

Soccer fans, your team is coming after you

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

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

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


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

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

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

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

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

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

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


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

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


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

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

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

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

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