Curated Insights 2018.06.10

Laying the pipes of a post-advertising world

Brands have always fought for a place in consumers’ hearts, and then relied on their loyalty for repeat business. Pipes are structural relationships that don’t rely on such fickle factors. They are built on more vertically integrated distribution channels and behave more like utilities — a way into people’s homes and lives attached to an account.

Amazon is the ultimate pipe. Their entire value is that they bring things to you — the things can change as necessary: movies, pickles, sneakers. They own the interface, the invisible moving parts, and the household. They understand your preferences intimately and have become arbiters of choice in many homes. Alexa, buy batteries. You get a big pack of generic batteries, rated 4.5 stars for a good price delivered to your home. Do we really need brands with brand managers and media agencies competing for our attention or do we just need batteries for the remote? If pipes offer simplified decision making, better value and validation — then brands as we know them lose their value.

Advertising was unsustainable from the beginning, for two key reasons. Firstly, when a market fills up, everyone needs to shout louder to get heard, until the noise drowns everything out and a vicious cycle sets in to the detriment of all. Secondly, advertisers pay to reach people, but the audience also pays, with perhaps the most precious resource of all, their attention. You pay attention, and our attentions are more burdened than ever. This is the perfect recipe for people to opt out, should we give them a way to, and we have. In a very short span of time, ads have gone from having captive audiences to being avoidable. Social feeds are designed to skip over anything that doesn’t interest you. Fast forwarding over TV ads is great, but watching ad free content (Netflix) is even better.

Not adapting carries the risk of becoming a price taker in the long run. Adapting can be either through building your own pipe infrastructure, not an easy task and especially difficult for companies not born out of technology, or renting someone else’s pipe and ceding power to them and again facing the potential of long term decline. Disney has chosen the former. Soon they will launch their subscription video competitor to Netflix. With a lot on the line, a transformation of epic proportions lies ahead. Whether it’s successful or not, it speaks volumes that the owner of the most magical brands in the world is entering the pipe race.

The list of advantages pipes and subscriptions have over brands and ads is overwhelming: more consistent income and cash flow, lower marketing costs, better access to customers, more flexibility and control of customer experience, better valuations and access to capital, better quality data and potential for AI. As these factors compound, the shift in the balance of power will accelerate.

Spotify uproar points to the power of the playlist

The furor reflects a reality of today’s music business: Playlists are the new radio, helping major artists rack up millions of streams and connecting lesser-known acts with new fans.

But the findings highlight how influential Spotify can be in determining which songs, albums and artists succeed in the streaming era, he adds. Justin Barker, group director of streaming strategy for PIAS, a U.K.-based group of record labels that works with musicians such as Father John Misty, says that for the majority of its new artists, roughly 60% to 80% of streams are on playlists owned and operated by Spotify.

Spotify has become “a very powerful intermediary,” Mr. Waldfogel says. “The music industry used to get bent out of shape about how much market share Walmart would have. This makes that seem quaint.”


Here’s what Fiat Chrysler’s five-year road map looks like

Adjusted Ebitda will rise to between 13 billion and 16 billion euros by 2022, up from about 6.6 billion in 2017. The 2017 figure excludes the Magneti Marelli parts unit that Fiat Chrysler plans to spin off at the beginning of 2019. Fiat Chrysler also said it will spend about 45 billion euros on capital investments as it tries to harness an evolving automotive market place driven by electrification, connected services and self-driving cars.

Fiat Chrysler plans to form a captive financial unit in the U.S. The company has an option to buy out its existing partner, Santander Consumer USA Holdings Inc., and has initiated discussions, Palmer said. Such a move could add $500 million to $800 million in incremental pretax earnings within four years, he said. Fiat could also start its own business, in which case the company envisions about $100 million in incremental profit. A captive finance unit will allow Fiat Chrysler to “participate more fully in capturing value from emerging platforms,” Palmer said, for example by securitizing vehicle fleets and offering access to service providers on a per-mile basis.

Jeep is targeting 1/12 of all sport utility vehicle sales worldwide by 2022, implying a will more than doubling of deliveries to as many as 3.3 million units, based on Bloomberg calculations from the presentation. Maserati will target Tesla Inc. with a full-electric sports car that reaches more than 186 miles per hour. All Maserati powertrains, including the electric ones, will be supplied by Ferrari NV, the supercar maker spun off from Fiat Chrysler in 2016.

Google emerges as early winner from Europe’s new data privacy law

The reason: the Alphabet ad giant is gathering individuals’ consent for targeted advertising at far higher rates than many competing online-ad services, early data show. That means the new law, the General Data Protection Regulation, is reinforcing—at least initially—the strength of the biggest online-ad players, led by Google and Facebook Inc.

Havas SA, one of the world’s largest buyers of ads, says it observed a low double-digit percentage increase in advertisers’ spending through DBM on Google’s own ad exchange on the first day the law went into effect. On the selling side, companies that help publishers sell ad inventory have seen declines in bids coming through their platforms from Google. Paris-based Smart says it has seen a roughly 50% drop. Amsterdam-based Improve Digital says it has experienced a similar fall-off for ads that rely on third-party vendors.

It took a $1 billion IPO for people to see why Adyen matters

By 2017, Adyen was processing in excess of $122 billion in payments for the year, an increase of 61 percent from the year before, and generated $1.2 billion in revenue, according to financial filings. Uber Technologies Inc., Netflix Inc., Spotify Technology SA, and Facebook Inc., are all customers.

Despite its success so far, Adyen still has some ways to go to catch up with the largest payments firms — Vantiv, Chase Paymentech and First Data each handle about $1 trillion annually — but Adyen differs from many of its rivals in a number of ways: Its transaction processing fees are typically lower than those of other young e-commerce oriented payments firms such as Stripe or Square, and it can handle transfers in more currencies and payment types than Chase Paymentech or Vantiv.

Olivier Bisserier, the chief financial officer at Booking.com, an Adyen customer, told Bloomberg in 2016 that he liked that Adyen was willing to “think like a tech company” rather than a bank. When Booking.com expanded into Argentina, Adyen helped build its payments processing gateway for that market at a time when larger payments processors were refusing to do so until the travel site could show significant sales volumes from the new geography.

Janitors are becoming millionaires thanks to this stock’s 9,500% rally

Sunny Optical’s affluent employees have benefited from the largesse of Wang Wenjian, who started the company in Yuyao, a small city on China’s eastern coast, in 1984. When Sunny Optical restructured from a so-called village and township enterprise into a joint-stock company in the 1990s, Wang took the rare step of distributing stakes beyond top management and later organizing the holdings into a trust that now has about 400 holders and owns 35 percent of the Hong Kong-listed company. Leaving a 6.8 percent stake for himself in 1994, Wang allowed quality inspectors, company cooks and cleaners to subscribe for shares at a negligible cost based on their position and years of service.

“When money gathers, people will be apart; when money is scattered, people will gather.”

Curated Insights 2018.06.03

How will GDPR affect digital marketers?

  • Organisations with an existing marketing database must re-solicit every person’s consent (via an explicit opt-in) since individuals may have been added to the database without their consent.
  • All opt-out consent boxes must be replaced by opt-in (without the box being pre-checked).
  • Collection and processing of data to deliver your core service (e.g. fulfil orders) can continue unchanged, but if you wish to use historical data for marketing purposes, you need consent.
  • Personalised ad targeting based on an individual’s specific behaviours, such as that offered by many programmatic media companies, is illegal without active content. However, targeting based on broad interest-based audience segments is permissible so long as individuals cannot be identified.
  • The purchasing or sharing of personal data (such as email lists) is prohibited unless each person in the list has expressly permitted their details to be passed on to third parties. Event organisers, for example, can no longer share lists of attendees with sponsors.
  • Where data must be passed to another organisation for legitimate business reasons, you should ensure they are also compliant with GDPR. This is particularly important if data is passed to organisations outside the EU who may be less familiar with its data protection obligations.
  • Your customers now have the right to ask what data you hold and to have their data deleted permanently.
  • Any breach of personal data integrity (e.g. through theft, hacking, or incompetence) must be notified to the authorities within 72 hours. Organisations should audit who has access to personal data and ensure they are aware of their GDPR security obligations.

The iPhone may not be what finally pushes Apple over $1tn

The performance of this services division, largely overseen by senior vice-president Eddy Cue, has been a model of consistency when placed next to the feast-or-famine performance of the iPhone. Since 2006, it has grown at an average rate of 23 per cent year on year, according to Gene Munster, a veteran Apple analyst turned investor at Loup Ventures.

If it was valued like other “software as a service” companies such as Adobe, Dropbox or Intuit, Mr Munster reckons, at a multiple of 10 times 2018’s estimated revenues, Apple’s services business would be worth $381bn all by itself. 

For Google, all roads lead back to search

Underpinning this is the mobile business, which has given Google’s search engine a new lease of life. With smartphone users carrying out more frequent internet searches, the “paid clicks” — the number of times users click on its advertisements — jumped 59 per cent in the first three months of this year, continuing an acceleration seen over recent quarters. Even with average ad prices falling 19 per cent, the result has been a pick-up in growth.

The question now is whether Google’s newer businesses will extend this momentum into new markets in the years to come. Foremost among them is YouTube. The online video arm already has $20bn in annual revenue and could grow at 20-30 per cent a year for the next five years, forecast Mark Mahaney, an analyst at RBC Capital Markets. The potential is enormous: YouTube’s revenue represents only around 10 per cent of the amount spent globally on traditional TV advertising.

Google’s cloud computing business, meanwhile, could represent an even bigger opportunity. The cloud market is projected to be worth nearly $250bn by 2021, according to tech research firm Gartner.

That could one day make driverless cars a huge business for Google. Analysts at UBS forecast that Waymo’s technology lead will translate into revenues for Alphabet in 2030 that are equivalent to 80 per cent of its entire group revenue in 2020.

Marchionne’s finale entails expanding Jeep, shrinking Fiat

Jeep — which accounts for more than 70 percent of profits, according to analysts’ estimates — will increasingly become the focal point of the group. Marchionne is set to target doubling the brand’s sales volume by 2022 from about 1.4 million vehicles last year. The growth is based on expanding Jeep’s presence in Asia, Brazil and Europe as well as widening its product offering with hybrid variants starting next year. Marchionne has already indicated that he sees chances to double the group’s profit in the coming five years on booming Jeep sales.

Buffett proposed $3 billion Uber investment but deal crumbled

Under the proposed agreement, Berkshire Hathaway would have provided a convertible loan to Uber that would have protected Buffett’s investment should Uber hit financial straits, while providing significant upside if Uber continued to grow in value, said the people, who spoke under condition of anonymity because the discussions were private. Buffett’s initial offer was well above $3 billion, one of the people said.

During negotiations Uber Chief Executive Officer Dara Khosrowshahi proposed decreasing the size of the deal to $2 billion, one person said, hoping to get Buffett’s backing while giving him a potentially smaller share of the company. The deal fell apart after the two sides couldn’t agree on terms, one of the people said.


Airbnb founders go it alone in China after refusing merger offer

Tujia remains keen to cut a deal—although both sides deny formal talks—and says it’s simply waiting for Airbnb executives to accept reality. “We would love to issue shares in Tujia in exchange for Airbnb’s China operations,” says Tujia Chief Financial Officer Warren Wang. Until Airbnb is ready, “we will prove ourselves and show our muscle,” he said. “If Airbnb needs more time to understand that they or any other foreign tech companies just can’t do that well in China without a local partner, once we show them they’ll sit down and talk about a deal.”

Home-sharing in China differs from the U.S. and Europe, where travelers are accustomed to a rich bed-and-breakfast culture and many hosts rent out their primary homes while they’re away. In China, hosts don’t want strangers in their own homes. Instead, home sharing has thrived because a national building boom left a glut of empty apartments in the hands of real estate firms and property investors. With homes vacant, local home-sharing companies are tapped to clean, list and manage properties.

Initially, Airbnb operated a skeleton operation in China with 30 people, focused on attracting mainlanders going overseas. Chinese tourists took 131 million overseas trips and spent $115 billion abroad last year, according to the China National Tourism Academy. But after noticing a surge of Chinese tourists using Airbnb abroad and thriving local home-sharing apps, the company in 2015 decided to expand its domestic China business. It’s a market well worth chasing: The domestic tourism industry took in 4.57 trillion yuan ($710 billion) in 2017, up 15.9 percent from the year before, according to the China National Tourism Administration. Unlike small hotel rooms, home stays let Chinese travel with extended families, cook Chinese fare and bring pets.

A Fed report this week found that gig work is a very small share of family income. For over 75% of gig workers, these activities account for 10% or less of their family income. This picture is also confirmed when looking at the ride-sharing market, see first chart below. The total number of Uber drivers in the US is 833,000 and translated into full-time full-year jobs there are about 100,000 Uber drivers. Comparing these numbers with US economy-wide employment of 148mn shows that the gig economy is more myth than reality. Another way to look at it is to think about how small a share of your total income goes to car services. If you still are not convinced, take a look at the second chart below, which shows the share of people who are self-employed. Why is the gig economy getting so much attention? It is probably because many people in Manhattan now use ride-sharing apps and mistakenly think that what they are seeing is representative for the rest of the economy.

Curated Insights 2018.05.27

Borrow…If you dare

Your problem is the margin. With $10,000 to start, if you borrowed millions, you would lose all of your equity. In fact, having a leverage ratio more than 4:1 ($30,000 borrowed) would have wiped you out in most years. It’s not a matter of if, but a matter of when.

As soon as he said it, I knew he was right. I had forgotten one of the simplest ideas in finance: the path matters. The problem is that while we know that you will get an a high return by the end of the year, if you hit a bad patch of too many negative return days in a row (which is normal), the leverage will wipe you out completely. In other words, the journey is more important than the destination.

The point of all of this is that even when we know the future with certainty, borrowing money isn’t a surefire solution to win big. Given we will never know the future with any degree of certainty, leverage is one of the most dangerous things you can do as a retail investor, so I do not recommend it. If Warren Buffett only levered 1.6:1 on average throughout his career, and he is arguably the greatest investor of all time, what chance do you stand of using leverage properly?

Your investment journey will effect you far more than your investment destination. Just because you know the market should get 7% on average each year doesn’t mean you won’t live through sharp declines and decades of no real returns. These kinds of events are rare, but they happen and they can affect how you perceive markets.

The Bill Gates Line

This is ultimately the most important distinction between platforms and aggregators: platforms are powerful because they facilitate a relationship between 3rd-party suppliers and end users; aggregators, on the other hand, intermediate and control it.

Of course that is the bigger problem: I noted above that Google’s library of ratings and reviews has grown substantially over the past few years; users generating content is the ultimate low-cost supplier, and losing that supply to Google is arguably a bigger problem for Yelp than whatever advertising revenue it can wring out from people that would click through on a hypothetical Google Answer Box that used 3rd-party sources. And, it should be noted, that Yelp’s entire business is user-generated reviews: they and similar vertical sites are likely to do a far better job of generating, organizing, and curating such data.

Presuming that the answer is the image on the right — driving users to Yelp is both better for the bottom line and better for content generation, which mostly happens on the desktop — and it becomes clear that Yelp’s biggest problem is that the more useful Google is — even if it only ever uses Yelp’s data! — the less viable Yelp’s business becomes. This is exactly what you would expect in an aggregator-dominated value chain: aggregators completely disintermediate suppliers and reduce them to commodities.


If we end up sitting around in self-driving cars watching ads, Google is going to make billions

New research from UBS predicts that US autonomous-vehicle revenue will reach $2.3 trillion by 2030—and 70% of the estimated is expected to come from selling experiences to the former drivers. The biggest opportunity—$1.2 trillion—will be in robo-taxi services, moving people and things around in autonomous vehicles.

The second-biggest opportunity, or $472 billion, will be in in-car monetization: selling ads or services against the time spent in the car not driving. Not surprisingly, UBS thinks Waymo—or more broadly, Google’s parent company Alphabet—will be the dominant player in this category, perhaps capturing 60% of the revenue. UBS thinks Waymo’s combined opportunities in services and software make Waymo worth $75 billion today, or roughly 11% of Alphabet’s current valuation.


Netflix misunderstandings, pt. 1: Netflix’s content budget is bigger than it seems

While it might seem pedantic to criticize statements such as “Netflix will spend between $7 billion and $8 billion on content in 2018,” the distinction is critical. To point, Netflix’s 2018 spend is likely to be closer to $12B. Not only is this nearly 50% more than publicized, it means that Netflix will spend more on non-sports content than any of its traditional TV peers (e.g. Disney, Time Warner, NBCUniversal) – even when their many individual networks are consolidated on a corporate basis. What’s more, the disconnect between Netflix’s cash spend on content and amortization expense has grown substantially over time. In 2012, this ratio was 1.1x (cash spend 10% higher than amortization). In both 2016 and 2017, it was 44%. As a result of this growth, the impact of conflating or confusing the two has also grown.

Netflix’s critics and competitors typically focus on the fact that, while profitable on an accounting basis, Netflix keeps spending more cash than it generates from operating its business. The company burned $2B in cash in 2017 (up from $1.7B a year earlier), and expects that figure to grow to $3–4B in 2018. What’s more, Netflix CEO Reed Hastings has promised that negative free cash flow will continue for “many years” and the company continues to accumulate debt (raising annual interest expenses) and content liabilities (increasing the amount it’ll need to pay suppliers over time). However, this cash loss only exists because Netflix is funding next year’s content against this year’s revenue. Netflix could have chosen to stabilize its 2018 content offering at 2017 levels (i.e. not ramp up spending), and its actual cash spent would have been just $6.2B (roughly equivalent to its content amortization) – a “savings” on the books of $2.7B. And had the company done this, it would would have generated $700MM in cash, not lost $2B.

Making sense of mortgages: The problem, and the opportunity

The single most important chart for any portfolio manager or investor – The power of diversification (low correlation)

Of course, the picture represents ideal conditions. There is some bad news with this free lunch. It is hard to find. You will not find many low correlated asset classes and those return to risk values can be volatile. The incremental improvement is strong with the first few diversifiers but there are diminishing returns after that initial boost.

In a practical sense, the first asset class you add to an equity portfolio will be bonds. It has been the great diversify for the last decade or two, but once you get beyond bonds and commodities, the ability to find those low correlation assets becomes much harder. This is the true value of alternative strategies

What does this chart mean in reverse? If there is an increase in correlation across asset classes, the return to risk will fall even if the return to risk of any given strategy stays constant. This is will be the incredible shrinking free lunch and is why it is so important to find strategies or investments that have stable correlation relative to traditional asset classes.

Return is critical but hard to forecast. Volatility is important and leads to downside risks. Unfortunately, many forget the power of covariance and its impact on diversification, yet this is component to portfolio construction that can have a strong impact.

Next climate challenge: A/C demand expected to triple

The amount of energy needed for cooling will triple, reaching a level equal to China’s total power demand, the new report finds. As the world warms in response to human-caused climate change, the need for air conditioning will become more acute, particularly in the Middle East and South Asia. IEA estimates that left unchecked, air conditioning will account for 18 percent of the total worldwide increase in CO2 emissions by 2050. And rising demand for cooling is “already putting enormous strain on electricity systems in many countries,” IEA said.

Curated Insights 2018.05.20

The spectacular power of Big Lens

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

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

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

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

The Moat Map

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

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

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

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

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

How much would you pay to keep using Google?

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

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


There is another

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

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


Subscriptions for the 1%

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

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

The Apple Services machine

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

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

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

MoviePass: the unicorn that jumped into Wall Street too soon

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

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

Cerebras: The AI of cheetahs and hyenas

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

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

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


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

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

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

China buys up flying schools as pilot demand rises

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

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

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

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

California will require solar power for new homes

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

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

Just half a percent

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

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

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

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

Curated Insights 2018.05.06

WeWork’s $20 billion dream: The lavishly funded startup that could disrupt commercial real estate

The company makes money primarily through rent arbitrage: charging its members more than it has to pay its landlords. The principal means of accomplishing this is by packing a lot of people into its locations. In WeWork’s buildings, the average square footage per person hovers around 50 square feet. This compares to 250 sq ft for commercial offices industry-wide. Despite this small footprint, members pay an average of $8,000 per year, with WeWork capturing a healthy 30 – 40% operating margin, according to the company.

WeWork is shifting from leases to co-management deals. In this scenario, landlords might pay for the renovation and buildout of offices and/or split membership profits 50/50, similar to the management agreement popularized by the hotel industry. Neumann says WeWork has followed this strategy nearly 100% of the time in markets like India and Israel.

In cities where there are numerous WeWork locations, each additional location serves to drive down membership churn. Artie Minson, WeWork’s former COO and current President, has noted, “in cities where WeWork opened more locations, membership cancellations declined.” While the vast majority of WeWork’s membership plans assign its members to a location, it does let members switch between locations.

First, it can quickly expand at scale, opening between 500K – 1M sqare feet per month. And second, it can design spatially efficient offices in non-identical locations. Both of these accomplishments rely on defensible strategic advantages, namely, a control of the complete building lifecycle and a mastery of data-informed design.

Why Amazon and Google haven’t attacked banks

Cloud spending by banks is expected to skyrocket. By 2021, banks globally are forecast to spend more than $12 billion on public cloud infrastructure and data services, up from $4 billion last year. By many metrics, the cloud business offers better opportunities to tech firms than, say, retail banking. Overall cloud-industry revenues are growing at about 60% year-over-year, Jefferies estimates. Meanwhile, retail-banking revenue, comprising products such as checking accounts and cards, at most big banks is growing at a fraction of that rate. And any real foray into banking or financial products could also entail substantial regulatory issues and expense.

Experts say Tesla has repeated car industry mistakes from the 1980s

Robots are supposed to allow production of more cars with fewer workers, but one ironic consequence of over-automation is that it can actually require more workers. Ingrassia and White report that GM’s Hamtramck plant had around 5,000 workers on its payroll in the mid-1980s, compared to 3,700 workers at a nearby Ford plant with many fewer robots. Yet the Ford plant was “outproducing Hamtramck by a wide margin.”

This kind of rapid iteration works well in the software industry because a programmer can change one line of code and then re-build the entire project with the click of a button. But physical manufacturing isn’t like that. Car design decisions have to be translated into physical tooling that takes months to build and fine-tune. And rapid iteration is a nightmare for suppliers, Shook added. “I talked to a supplier and asked ‘who’s your worst customer'” Shook said. “The answer was Tesla. How can you be a good supplier when you don’t know when you’re supposed to deliver?”

Free cash flow to whom?

Alphabet has 1,000 shares trading at $50. They buy back 100 shares for $500. They should now have 900 shares. However in their financial statements, it says they now have 1100 shares, due to 200 shares being issued to employees. Those 100 net new shares are worth $500, which we then subtract from the financial year’s free cash flow, to arrive at a new Free Cash Flow with Hypothetical Cash Compensation™ metric.

When a company’s share price is rising, prospective employees are more than happy to be paid in stock units that incrementally mature over four years. Companies with the best-performing stocks will be able to attract the best talent, which (all else being equal) should improve the performance of the business, and therefore increase the share price in a virtuous cycle.

But that cycle can effectively function as a type of confidence game as well. While it makes good times look especially good, it can make the bad times far worse. In a severe share-price decline, engineers will likely be reticent to receive stock-based compensation instead of cold hard cash, which would put pressure on operating margins and cash flow. And as share prices fall, companies would have to pony up more stock to provide the same compensation, and further dilute the shareholder base.

Air pollution kills 7 million people a year, WHO reports

Nine of 10 people around the world are exposed to dangerously high levels of pollutants that can lead to cancer and cardiovascular diseases. Air pollution levels were the highest in the eastern Mediterranean and southeast Asia, where in some areas airborne toxins were five times WHO limits and disproportionately affected the poor and most vulnerable. About 3 billion people are breathing deadly fumes from domestic cooking stoves and fires. Household air pollution caused an estimated 3.8 million deaths in 2016.

The Grumpy Economist: Basecoin

The Fed was founded in 1907 in part to provide an “elastic currency,” exactly the lesson missing from bitcoin and at the center of basecoin. Alas, the Fed trades money for treasury bonds, backed by taxes, not for Fed bonds backed by future seignorage. And laws against using foreign currency or issuing private currency help a lot. Basecoin buyers will soon learn the lesson that bonds cannot pay more interest than money in a liquid market, and that claims to future seignorage cannot back money in the face of competitive currencies.


Ray Dalio: An unconventional take on success

Everything I’ve done with a singular focus on economics has fallen short. Everything I’ve pursued because I believed in the intrinsic value has exceeded expectations. Assessing a business based on unit economics is especially popular today. But a durable competitive advantage comes from the value it creates for its stakeholders. If you get that right, the unit economics will follow. Economics is not always an accurate reflection of intrinsic value. The same can be said of a career.

Curated Insights 2018.04.29

Amazon shareholder letter 2017

In the very first lesson, the coach gave her some wonderful advice. “Most people,” he said, “think that if they work hard, they should be able to master a handstand in about two weeks. The reality is that it takes about six months of daily practice. If you think you should be able to do it in two weeks, you’re just going to end up quitting.” Unrealistic beliefs on scope – often hidden and undiscussed – kill high standards. To achieve high standards yourself or as part of a team, you need to form and proactively communicate realistic beliefs about how hard something is going to be – something this coach understood well.

The football coach doesn’t need to be able to throw, and a film director doesn’t need to be able to act. But they both do need to recognize high standards for those things and teach realistic expectations on scope. Even in the example of writing a six-page memo, that’s teamwork. Someone on the team needs to have the skill, but it doesn’t have to be you. (As a side note, by tradition at Amazon, authors’ names never appear on the memos – the memo is from the whole team.)

How China is buying its way into Europe

We analyzed data for 678 completed or pending deals in 30 countries since 2008 for which financial terms were released, and found that Chinese state-backed and private companies have been involved in deals worth at least $255 billion across the European continent. Approximately 360 companies have been taken over, from Italian tire maker Pirelli & C. SpA to Irish aircraft leasing company Avolon Holdings Ltd., while Chinese entities also partially or wholly own at least four airports, six seaports, wind farms in at least nine countries and 13 professional soccer teams.

Importantly, the available figures underestimate the true size and scope of China’s ambitions in Europe. They notably exclude 355 mergers, investments and joint ventures—the primary types of deals examined here—for which terms were not disclosed. Bloomberg estimates or reporting on a dozen of the higher-profile deals among this group suggest an additional total value of $13.3 billion. Also not included: greenfield developments or stock-market operations totaling at least $40 billion, as compiled by researchers at the American Enterprise Institute and the European Council on Foreign Relations, plus a $9 billion stake in Mercedes-Benz parent company Daimler AG by Zhejiang Geely Holding Group Co. chairman Li Shufu reported by Bloomberg.

Is Google cheap?

According to Net Market Share, Google has around 82 per cent of the entire online search market. That figure includes China, where they are banned. Bing has around 5 per cent of the pie so, if the 3 trillion figure for Search holds true, Microsoft’s competitor processes 6,022 searches per second, versus Google’s 96,450.

Our readers may also point out Alphabet’s dependence on advertising revenues, a historically cyclical business which is an easy tap to turn off for many corporations in economic downturns. That being said, one could easily counter by mentioning the good ship Alphabet’s serene sail through the currently stormy waters of the wider advertising world. Or the fact that there are very few alternatives in terms of audience reach.

We have not even accounted for Google’s famed ‘Other Bets’ line — a collection of misfit, moonshot investments including self-driving software Waymo, health-data laboratory Verily Sciences and Alphaville favourite, smart-city planner SideWalk Labs.

Open, closed, and privacy

To focus on simply Google and Facebook, though, is to miss how much other data collection is going on: ad networks are tracking you on nearly every website you visit, your credit card company is tracking your purchases (and by extension your location), your grocery store is tracking your eating habit, the list goes on and on. Moreover, the further down you go down the data food chain, the more likely it is that data is bought and sold. That, of course, is as open as it gets.

First, it is even more unlikely that a challenger to either will arise without meaningful access to their proprietary data. This, to be fair, was already quite unlikely: the entire industry learned from Instagram’s piggy-backing on Twitter’s social graph that sharing data with a potential competitor was a bad idea from a business perspective.

Second, Google and Facebook will increasingly be the only source of innovations that leverage their data; it will be too politically risky for either to share anything with third parties. That means new features that rely on user data must be built by one of the two giants, or, as is always the case in a centrally-planned system relative to a market, not built at all.

Third, Google and Facebook’s advertising advantage, already massive, is going to become overwhelming. Both companies generate the majority of their user data on their own platforms, which is to say their data collection and advertising business are integrated. Most of their competitors for digital advertising, on the other hand, are modular: some companies collect data, and other collect ads; such a model, in a society demanding ever more privacy, will be increasingly untenable.


Facebook beats in Q1 and boosts daily user growth to 1.45B amidst backlash

Zuckerberg says one of his biggest regrets is that Facebook didn’t get to shape the mobile ecosystem because the company was still small when iOS and Android launched. That’s why Zuckerberg is adamant about Facebook having a major role in the future of virtual reality and augmented reality, which he sees as computing platforms of the future.

Global recorded music revenues grew by $1.4 billion in 2017

Global recorded music revenues reached $17.4 billion in 2017, up from $16 billion in 2016 — an annual growth rate of 8 percent. Streaming revenues in particular have contributed to this growth, and were up 39 percent year-over-year to reach $7.4 billion, or 43 percent of all revenues. But perhaps the biggest story of all is the growth of artists without labels. With 27.2% year-on-year growth this was the fastest growing segment in 2017.

Investing and business lessons from Aileen Lee (Cowboy Ventures)

Venture investors are looking for large addressable markets. How big is the market? What is the problem that you’re trying to solve? Who’s on your team? And how relevant is the team to that problem? What is the product that you’ve built, if you have built something? Or what do the wireframes look like? What kind of traction or feedback have you gotten from the market in terms of whether people are going to like the product, or whether they do like the product? What does the financial model and the economic model look like? What are you going to do with the money?” “What is the mission and vision of the company? Venture investors are looking for a big mission and vision that’s quite ambitious and that can be backed up by, ‘Here’s where we want to be and here’s how we’re going to get there over time. This is what we want to get done the next 12 months or the next 18 months.’

If you don’t attack a big market, it’s highly unlikely you’re ever going to build a big company. Great markets make great companies. We’re never interested in creating markets – it’s too expensive. We’re interested in exploiting markets early. I like opportunities that are addressing markets so big that even the management team can’t get in its way.

Why is China treating North Carolina like the developing world?

It’s about 50 percent cheaper to raise hogs in North Carolina than in China. This is due to less-expensive pig-feed prices and larger farms, but it’s also because of loose business and environmental regulations, especially in red states, which have made the U.S. an increasingly attractive place for foreign companies to offshore costly and harmful business practices.

How?

The market is all about discounting and expectations. It always has been and it always will be.

On January 31, 2006, Google Inc. announced its financial results for the fourth quarter of 2005: revenues up 97%, net profit up 82%. It’s hard to imagine how such phenomenal growth could be bad news. But Wall Street’s analysts had expected Google to do even better….Google’s stock fell 16% in a matter of seconds, and the market in the shares had to be officially halted. When trading resumed, Google, whose stock had been at $432.66 just minutes earlier, was hammered down to $366…Google earned about $65 million less than Wall Street had expected, and in response Wall Street bashed $20.3 billion off Google’s market value.

Basis—the “stable” cryptocurrency with $133 million invested—explained

Basis coins won’t be directly backed by dollars or any other asset. Instead, the Basis blockchain will attempt to adjust the supply of Basis coins over time to maintain a peg to the dollar, much as foreign central banks expand and contract their own money supplies to maintain a stable currency value.

The more consequential change is the addition of a third asset class called bonds. When the value of Basis coins falls, the system creates new bonds and sells them for Basis coins. Each bond has a face value of one Basis coin (and hence $1), but investors can acquire them at a market-determined discount.

Then, during a subsequent expansion, the system pays back these bondholders before paying anything out to shareholders. Bondholders get their money back in a first-in-first-out order, with the oldest bond being repaid first.

In effect, buying a bond amounts to making a bet that the demand for coins will rebound in a timely fashion. The less confident the market is that this will happen, the steeper the discount—a bond might sell for 0.8, 0.5, or even 0.2 Basis coins—and the greater the potential profit.

Kids worldwide spend less time outdoors, and then need glasses

Eyeglass sales are expected to double globally between 2012 and 2026, and the amount of time people are spending indoors may be a leading cause. By 2050, half of the global population, or almost 5 billion people, are projected to be nearsighted, up from a quarter, or 1.4 billion, in 2000.

Interestingly, however, while outdoor time helps to prevent nearsightedness, it doesn’t seem to affect its progression once it develops. The same recent summary suggests that the rapid rises in Asia are related in part to outdoor time: “The limited questionnaire data available suggests that the time that children spend outdoors is lower in the developed countries of East and Southeast Asia.”

Curated Insights 2018.04.22

Disneyflix is coming. And Netflix should be scared.

But in film, as in television, Disney relies on middlemen to deliver its content—and middlemen always take a cut. To buy a ticket to see a Disney film in theaters, you pay an exhibitor that keeps about 40 percent of the ticket price. What if Disney bypassed the middlemen and put a highly anticipated film like Black Panther on its streaming service the same day it opened in theaters—or made the film exclusive to subscribers? In the short term, sacrificing all those onetime ticket buyers might seem financially ruinous. But the lifetime value of subscriptions—which renew automatically until actively canceled—quickly becomes profound. If the film’s debut encouraged just over 4 million people to sign up for an annual subscription to a $10-a-month Disneyflix product—about the same number of subscribers that Netflix added the quarter it debuted its original series House of Cards—Disney would earn a net revenue of nearly $500 million in just the first year. Black Panther was a massive hit as a theatrical release; it could have been even bigger had it been used to transform onetime moviegoers into multiyear Disneyflix subscribers.

The math might make this seem like an easy call for Disney, but let’s not underplay how radical this move would be, and how seismic the effects on the existing entertainment industry. In recent years, the theatrical-release business has been carried by blockbusters—and Disney has been perhaps the most reliable producer of those. From 2010 to 2017, films earning more than $100 million have grown from 48 percent to 64 percent of the domestic box office, according to the research firm MoffettNathanson—and Disney has made the year’s top-grossing film in six of the past seven years. If Disney moves its films, en masse, to a proprietary streaming platform, it would smash movie theaters’ precious window of exclusivity and leach away crucial revenue. Exhibitors such as AMC and Regal may find themselves on an accelerated path to bankruptcy or desperate consolidation.

In this vision, Disneyflix wouldn’t just be Netflix with Star Wars movies—it would be Amazon for Star Wars pillowcases and Groupon for rides on Star Wars roller coasters and Kayak for the Star Wars suite at Disney hotels. That’s a product that could rival Netflix and create the kind of profits Disney has enjoyed during its unprecedented century of dominance. The company just has to destroy its own businesses—and the U.S. entertainment landscape—to build it.

Zillow, aggregation, and integration

To quickly summarize, I wrote that Aggregators as a whole share three characteristics:

  • A direct relationship with users
  • Zero marginal costs to serve those users
  • Demand-driven multi-sided networks that result in decreasing acquisition costs

This allows Aggregators to leverage an initial user experience advantage with a relatively small number of users into power over some number of suppliers, which come onto the platform on the Aggregator’s terms, enhancing the user experience and attracting more users, setting off a virtuous cycle of an ever-increasing user base leading to ever-increasing power over suppliers.

Not all Aggregators are the same, though; they vary based on the cost of supply:

  • Level 1 Aggregators have to acquire their supply and win by leveraging their user base into superior buying power (i.e. Netflix).
  • Level 2 Aggregators do not own their supply but incur significant marginal costs in scaling supply (i.e. Airbnb or Uber).
  • Level 3 Aggregators have zero supply costs (i.e. App Stores or social networks)

Remember, Zillow is in nearly every respect already an Aggregator: it is by far the number one place people go when they want to look for a new house, and at a minimum the starting point for research when they want to sell one. They own the customer relationship! What has always been missing is the integration with the purchase itself — until last week. Zillow is making a play to be a true Aggregator — one that transforms its industry by integrating the customer relationship with the most important transaction in its respective value chain — by becoming directly involved in the buying and selling of houses.

Here, though, Zillow’s status as an almost-Aggregator looms large: we now have years’ worth of evidence that realtors will do what it takes to ensure their listings appear on Zillow, because Zillow controls end users. It very well may be the case that realtors will find themselves with no choice but to continue giving Zillow the money the company needs to disrupt their industry.


Facebook to put 1.5 billion users out of reach of new EU privacy law

If a new European law restricting what companies can do with people’s online data went into effect tomorrow, almost 1.9 billion Facebook Inc users around the world would be protected by it. The online social network is making changes that ensure the number will be much smaller.

The change affects more than 70 percent of Facebook’s 2 billion-plus members. As of December, Facebook had 239 million users in the United States and Canada, 370 million in Europe and 1.52 billion users elsewhere.

In practice, the change means the 1.5 billion affected users will not be able to file complaints with Ireland’s Data Protection Commissioner or in Irish courts. Instead they will be governed by more lenient U.S. privacy laws, said Michael Veale, a technology policy researcher at University College London. Facebook will have more leeway in how it handles data about those users, Veale said. Certain types of data such as browsing history, for instance, are considered personal data under EU law but are not as protected in the United States, he said.


Why all my books are now free (aka a lesson in Amazon money laundering)

One reader forwarded this article on Amazon Money Laundering written by Brian Krebs. He argues that serious money laundering is going on with stolen credit cards: “Reames said he suspects someone has been buying the book using stolen credit and/or debit cards, and pocketing the 60 percent that Amazon gives to authors. At $555 a pop, it would only take approximately 70 sales over three months to rack up the earnings that Amazon said he made.”

My guess is eventually you’ll see the government step in, fine the crap out of Amazon, which will then be followed by a multi-billion dollar class-action lawsuit.

The iPhone X generated 5X more profit than the combined profit of 600+ Android OEMs during Q4 2017

The iPhone X alone generated 21% of total industry revenue and 35% of total industry profits during the quarter and its share is likely to grow as it advances further into its life cycle. Additionally, the longer shelf life of all iPhones ensured that Apple still has eight out of top ten smartphones, including its three-year-old models, generating the most profits compared to current competing smartphones from other OEMs.

Apple remained the most profitable brand, capturing 86% of the total handset market profits. Further splitting profits by model, the top 10 models captured 90% of the total handset profits.

Car dealerships face conundrum: Get big or get out

Dealers say they need to as much as triple revenue in the next half-decade to offset shrinking margins and increasing competition from companies that didn’t exist a decade ago…These developments have helped fuel consolidation of the 16,800 U.S. dealerships into the hands of fewer owners. The top 50 dealer groups are poised to book more than $175 billion in revenue this year, compared to $144 billion when Mr. Buffett’s Berkshire Hathaway Inc. entered the sector four years ago.

Your future home might be powered by car batteries

By allowing car batteries to serve as a residential power source, Nissan says its vehicle-to-home service cuts utility bills by about $40 per month. Still, only about 7,000 car owners have adopted the system in the six years since it started, a tiny number compared with the 81,500 Leaf EVs that Nissan has sold so far in the country.

A small test this winter showed how hard it is just to get people to charge their cars at the right time. (Selling power back to the grid is a separate can of worms.) Nissan and the utility convinced 45 of their own employees to install home chargers and try monitoring electricity demand on weekends, using a smartphone app. Even though volunteers got free shopping points on Amazon as a reward for buying power when there was glut, only about 10 percent succeeded.

It’s a slow beginning, but Nuvve Chief Executive Officer Gregory Poilasne says vehicle-to-grid systems could eventually speed up the adoption of electric vehicles once people realize their batteries can earn them money. Poilasne says his clients make more than $1,000 per car each year by trading power to the spot market.


Blockchain is about to revolutionize the shipping industry

Should they succeed, documentation that takes days will eventually be done in minutes, much of it without the need for human input. The cost of moving goods across continents could drop dramatically, adding fresh impetus to relocate manufacturing or source materials and goods from overseas.

“This would be the biggest innovation in the industry since the containerization. It basically brings more transparency and efficiency. The container shipping lines are coming out of their shells and playing catch-up in technology.”

In 2014, Maersk followed a refrigerated container filled with roses and avocados from Kenya to the Netherlands. The company found that almost 30 people and organizations were involved in processing the box on its journey to Europe. The shipment took about 34 days to get from the farm to the retailers, including 10 days waiting for documents to be processed. One of the critical documents went missing, only to be found later amid a pile of paper.

Chinese money floods U.S. biotech as Beijing chases new cures

Venture-capital funds based in China poured $1.4 billion into private U.S. biotechnology firms in the three months ending March 31, accounting for about 40 percent of the $3.7 billion that the companies raised in the period overall, according to data provider PitchBook. At the same time a year earlier, Chinese funds invested $125.5 million, only about seven percent of the total.

China once lagged other countries in drug spending despite its large population, but outlays have expanded over the past decade. In 2012, China surpassed Japan to become the second-largest global drug market behind the U.S., according to a report from health-technology firm Iqvia, formerly known as QuintilesIMS. It could spend as much as $170 billion by 2021, compared to $116.7 billion in 2016, the firm said.

Selling drugs in China is also getting easier. Western companies usually waited for approval elsewhere before starting clinical trials in China because of the country’s cumbersome rules. But those restrictions have been relaxed, leading U.S. companies to view China as a more important market, and making Chinese investors hungry for to share in the returns from new therapies.

Technique to beam HD video with 99 percent less power could sharpen the eyes of smart homes

Backscatter is a way of sending a signal that requires very little power, because what’s actually transmitting the power is not the device that’s transmitting the data. A signal is sent out from one source, say a router or phone, and another antenna essentially reflects that signal, but modifies it. By having it blink on and off you could indicate 1s and 0s, for instance.

Assembly and rendering of the video is accomplished on the receiving end, for example on a phone or monitor, where power is more plentiful. In the end, a full-color HD signal at 60FPS can be sent with less than a watt of power, and a more modest but still very useful signal — say, 720p at 10FPS — can be sent for under 80 microwatts. That’s a huge reduction in power draw, mainly achieved by eliminating the entire analog to digital converter and on-chip compression. At those levels, you can essentially pull all the power you need straight out of the air.

Casualties of your own success

I valeted at a hotel in college. We parked 10,000 cars a month. And we banged one of them up every month, like clockwork. Management found this atrocious. Every few weeks we’d be scolded for our recklessness. But one accident in 10,000 parks is actually pretty good. If you drive twice a day, it’ll take you 14 years to park 10,000 times. One bent fender every 14 years is a driving record your insurance company won’t bat an eye at. The only reason we seemed reckless is because we parked so many cars. Size (or volume) put a negative spotlight on us that being less busy with the same parking skills would have masked. Big companies deal with this too. Chipotle sells half a billion burritos a year. You, at home, washing everything in bleach, could never make one carnitas burrito a day for half a billion days (1.4 million years) and expect to avoid a foodborne illness.

One is that everything moves in cycles. You can’t extrapolate the benefits of growth because growth comes attached with downsides that go from annoying at one size to catastrophic at another. Rising valuations that come with investment growth is the clearest example, but it’s everywhere: Headcount, media attention, AUM, and influence have downsides that can eventually grow faster than their benefits. Remembering that volatility is attracted to outlier growth puts many things about business and investing in context.

The second is size is associated with success, success is associated with hubris, and hubris is the beginning of the end of success. Some of the most enduring animals aren’t apex predators, but they’re very good at evasion, camouflage, and armour. They’re paranoid. I always come back to the time Charlie Rose asked Michael Moritz how Sequoia Capital has thrived for three decades, and he said, “We’ve always been afraid of going out of business.” Paranoia in the face of success is extremely hard but in hindsight it’s the closest thing to a secret weapon that exists.

Debt recycling

By investing a total of $55,097.13 I was able to purchase 3 properties over a 5 year period, with a combined value of just over $1,000,000. Two years later I sold one of the properties, using the proceeds to reduce the leverage of the remaining portfolio. I was able to recover my $55,000 of cash contributions, and still be left with equity worth over $473,000. At that point I could have sold a second property and used to proceeds to fully pay off the mortgage on the remaining property. This could have provided me with rent/mortgage free accommodation for the rest of my life, or alternatively contributed $26,000 in annual free cash flow towards covering my own lifestyle costs.


Why ‘sleep on it’ is the most useful advice for learning — and also the most neglected

Walker relates problem solving to the REM phase of sleep, demonstrating that it is in this critical stage of unconsciousness that we form novel connections between individual chunks of knowledge. REM sleep is where our ideas crystallise and recombine into new, creative thoughts.

The premise of adaptive timetabling does not fit will with a standardised model that runs on a fixed clock. Sleep does not lend itself to the measurement paradigms of today’s education system. Education is mired in empiricist dogma, hell-bent on measuring whatever it can, and then assigning importance only to what has been measured. It should be evident that the nature of problem solving, so much of which is rooted in unconscious thought, is holistic and beyond the blunt tools of written assessment. Any timed exam that seeks to capture students’ problem solving skills within a fixed period is, by the findings of neuroscience, a contradiction in terms.

Curated Insights 2018.03.18

Remember to look up at the stars and not down at your feet. Try to make sense of what you see, and wonder about what makes the universe exist. Be curious. And however difficult life may seem, there is always something you can do, and succeed at. It matters that you don't just give up. -- Steven Hawking (1942-2018)

An Apple R&D bonanza

Much of this focus mantra is driven by the fact that Jony Ive and his Industrial Design group oversee Apple’s product vision and the user experience found with Apple products. With only 20 or so members, Jony and team can only do so much at any given moment. In a way, Apple’s organizational and leadership structure serve as safeguards preventing Apple from spreading itself too thin and doing too much. Instead of trying to expand the design team in order to work on more products, Apple’s strategy appears to be to do the opposite and place bigger bets on a few products.

These bigger bets come in the form of owning the core technologies powering Apple devices. Apple wants to reduce dependency on others. We are quickly moving to the point at which every Apple product will be powered by core technologies developed in-house. Such a reality would have been a pipe dream just a few years ago. Apple believes this strategy will give them an advantage in the marketplace. It’s a new twist to the Alan Kay line about “people who are really serious about software should make their own hardware.” We are moving to the point at which companies serious about software should design their own silicon. Having $285 billion of cash on the balance sheet gives Apple the freedom to pursue this ambitious goal. It is this motivation to control more of the user experience while pursuing new industries to enter that is driving the remarkable increase in Apple R&D expenditures.


Apple goes from villain to coveted client with this Finnish firm

Created through a merger of Sweden’s Stora AB and Finland’s Enso Oyj in 1998, the company has spent billions shifting from the declining paper business — as people increasingly switched to digital from printed newspapers — to focusing on innovative wrappings made from tree and plant fibers. More than a third of its sales now come from consumer board and packaging solutions, up from a fifth two decades ago.

Apple has undergone its own shift, away from plastic packaging. For its recent iPhone 8 launch, Apple used a fiber-alternative instead of the polypropylene wrap around the power adapter. The packaging for the iPhone 7 used 84 percent less plastic than the previous version.


Intel fights for its future

“…Broadcom is already an Apple parts supplier, and it wouldn’t want to jeopardize a good relationship with a negotiation over royalties. The exact percentage that Qualcomm charges in royalties is of the utmost importance to a standalone Qualcomm…But for a merged Broadcom-Qualcomm, the exact amount of the royalty would be less important than a good working relationship with Apple.”

If the dispute is settled, Intel loses its wireless modems deal with Apple. No mobile CPUs + no modems = nothing of substance. Broadcom would be in charge — they would hold all the cards.


Google wants to impose order on India’s street address chaos

Google is tackling the project as part of its own search for the next billion users. Non-standard addresses now increase the costs of running all types of commerce from ride-hailing to online retailing and food delivery. Plus Codes — in a ‘6-character + city’ format — can be generated and shared by anyone on Google Maps, while apps that use location services can incorporate those codes on their own platforms. And a user can enter the Plus Code into searches to call up a location. Google Maps is also adding voice navigation in six more Indian languages, after introducing Hindi three years ago.

WhatsApp could shake up digital payments in India

At stake is an Indian digital payments market that Credit Suisse Group AG estimates could be worth $1 trillion within five years and has homegrown and global players jostling for dominance. WhatsApp joins Google, Alibaba-backed Paytm, a unit of local e-commerce leader Flipkart and dozens of others already vying for customers as smartphone adoption surges. Mobile payments caught fire at the end of 2016 when the government’s demonetization temporarily took 86 percent of all paper currency out of circulation to tackle corruption.

“WhatsApp is likely to change the digital payments scenario by cannibalizing other wallets’ users and adding new converts,” said Satish Meena, an analyst at Forrester Inc. “Its base of 200 million users, a daily active usage that’s about 20 times higher than Paytm’s, and the fact that Indian users spend a lot more time on WhatsApp than even on parent Facebook has huge advantages,” said Meena.


Amazon turbocharged Audible’s domination of audiobooks

Audible accounts for about 41 percent of all audiobooks sold, including digital and physical formats, according to researcher Codex Group LLC. Amazon also sells audiobooks directly through its website and, with Audible, accounts for more than half the market. Audible doesn’t disclose financial information, but says its annual subscriber growth is in double digits. Most customers pay $15 for a monthly subscription that comes with a single audiobook. (A la carte, they often cost more than $20.) The company’s library includes 400,000 titles.


How Amazon’s bottomless appetite became corporate America’s nightmare

For many companies, perhaps what’s scariest is that Amazon has lots of room to grow, even in retail. In the U.S., more than 90 percent of all retail sales still happen in physical stores. In some big categories, including home furnishings, ­personal-care products, toys, and food, the brick-and-­mortar numbers are even higher. As the share of online shopping continues to increase, Amazon seems likely to benefit the most. It’s responsible for roughly 44¢ of every dollar Americans spend online, and it’s now mixing in retail stores.

Amazon is far from invulnerable. All the same old red flags are there—a puny 2.7 percent e-commerce profit in North America, massive outlays to establish delivery routes abroad—but few are paying attention. Anyone buying a share of Amazon stock today is agreeing to pay upfront for the next 180 years of profit. By one measure, it’s generating far less cash than investors believe. And its biggest risk may be the fear of its power in Washington, New York, and Brussels, a possible prelude to regulatory crackdown.


Netflix’s secrets to success: Six cell towers, dubbing and more

Why Netflix almost never goes down. The company’s service achieved an availability rate of 99.97% in 2017, according to Netflix engineering director Katharina Probst. Part of that is due to the fact that Netflix learned from outages early on, and now uses Amazon’s AWS data centers across three regions. When one of those regions does go down, Netflix automatically redirects all of its traffic to the two other regions.

In fact, the company even tests this fall-back regularly by just taking a region offline itself — something the company calls chaos engineering. “We intentionally introduce chaos into our systems,” explained Probst. Up until recently, it took Netflix up to an hour to successfully redirect all requests in case of such a massive failure. More recently, the company was able to bring that time down to less than 10 minutes.

Amex to woo retailers with biggest fee cut in 20 years

At a presentation for investors in New York last week, the company said the global average of the fees it charges merchants — known as its discount rate — would decline five or six basis points this year, to about 2.37 per cent. Each basis point is equivalent to about 11 cents of earnings per share, said Don Fandetti of Wells Fargo Securities.

The fee cuts for 2018, which are about double previous guidance, are the latest sign of competitive and regulatory pressures on the biggest US consumer finance company by market value. American Express is facing questions from Wall Street about competition from US banks, which use the rival payment networks Visa or MasterCard. Big-spending Americans have flocked to premium cards issued by banks.


SoftBank looks to invade Wall Street’s turf

Until recently, SoftBank’s fledgling investment arm was little more than a group of analysts in Tokyo and London sifting through possible deals. Buying Fortress provided the group with a template to use as it moved to becoming an actual institution, with a formal investment committee, compliance department, trading desk and investor relations unit. The new entity is now 1,000 people strong.


How China’s Huawei killed $117 billion Broadcom deal

Huawei uses Broadcom’s chips in networking products such as switches that direct data traffic between connected computers. Qualcomm also works with Huawei. The two said on Feb. 21 they completed testing on technology that advances faster 5G mobile services. Under one envisioned scenario, wireless carriers may be forced to turn to Huawei or other Chinese companies for cutting-edge telecoms gear. That’s unacceptable for a U.S. government that, concerned about the security of Huawei’s gear, has already blocked the sale of the Chinese company’s smartphones on American carriers’ networks.

Government officials and industry executives have long harbored suspicions that the closely held Huawei works primarily for Chinese government interests, especially as it sells increasing amounts of critical telecoms infrastructure to Europe, Africa and the Middle East.

WordPress is now 30 per cent of the web

Public data recorded that WordPress’s share of the top 10 million websites had ticked over from 29.9 per cent to 30 per cent. The firm put some context on that data by noting that 50.2 per cent of the world’s websites don’t run a content management system (CMS) at all. That means WordPress has over 60 per cent share among websites that do run a CMS. That’s a dominance few products in any category can claim. It’s also notable that WordPress has nearly ten times the market share of its nearest competitor, Joomla, which has 3.1 per cent share of all websites and 6.3 per cent of the CMS-using population.

Share buybacks work better in theory than in practice

The top 20 companies in terms of buybacks accounted for almost 50 percent of total expenditures.

The main problem with buybacks is that effects of bad decision-making don’t become clear until much later. To paraphrase Jeff Macke, stock buybacks are an allocation decision that has a hypothetical value to shareholders, but a real explicit value to option-holding executives. These people are supposed to be managing companies for the long term but get compensated over the short term. This misalignment if incentives should be a concern. It does seem like those with a vested short-term interest in stock prices put a thumb on the scale away from investments or dividends and towards buybacks.

Diving into the detail, the top culprit was Biotech companies, with 97% of biotech IPOs in the loss making camp. Second place, no prizes for guessing, was Technology companies at 83%. But interestingly enough that left 'all other companies' at 57% - which is actually a record high.

What’s the biggest trade on the New York Stock Exchange? The last one

Last year, 26% of all trading activity on the NYSE’s flagship exchange took place in the last trade of the day, up from 17% in 2012, exchange data shows. Last year, trades at the close accounted for more than 8% of trading volume in S&P 500 stocks, nearly four times what it was in 2004, according to Credit Suisse .

At least $10 billion worth of shares are traded in the NYSE’s closing auction on an average day, with a final tally of stock prices typically listed by 4:05 p.m.

A fund manager such as Vanguard, for instance, might need to buy millions of shares at a time. Making such a big purchase in the middle of the day could dry up supply, causing the price of the stock to jump—bad for Vanguard. By waiting to trade at a time when there are millions of shares being bought and sold, the risk of moving the price is reduced, saving Vanguard money.

Last year, the NYSE collected $87 million—45% of its net revenue from the exchange’s core stocks-trading business—from trading at the close, according to the research firm Equity Research Desk. The NYSE’s maximum fees for trading at the close have gone up 16% over three years, according to regulatory filings.


Is the US stock market overvalued? Depends on which model you ask

The Fed model was valid during the period from 1958 to 2010. Since after 2010 there has been no relationship between the stock’s earnings yield and the bond yield, the Fed model cannot be used to judge whether the US stock market is overvalued. In other words, the Fed model cannot support the high current CAPE ratio on the grounds of the low-rate environment.

The Shiller model is over-simplistic. It is justified only on the grounds that there is an empirical inverse relationship between the CAPE value and the subsequent stock market return over horizons ranging from 10 to 15 years. What is less known about the validity of the Shiller model is that it has forecasting power only for real returns.

The other serious problem with the Shiller model is that it cannot be successfully used to time the market. If the investor believes in the validity of the Shiller model, this investor should buy the stocks in the early 1970s. However, in this case, the investor would be highly disappointed because the stock prices had been decreasing till the early 1980s. Similarly, if the investor uses the Shiller model, this investor would sell stocks in the early 1990s, missing out on huge net gains over the full bull/bear cycle.

Pozen Priorities

“The common practice we found among the highest-ranked performers in our study wasn’t at all what we expected. It wasn’t a better ability to organize or delegate. Instead, top performers mastered selectivity. Whenever they could, they carefully selected which priorities, tasks, meetings, customers, ideas or steps to undertake and which to let go. They then applied intense, targeted effort on those few priorities in order to excel.”


Ironies of luck

If risk is what happens when you make good decisions but end up with a bad outcome, luck is what happens when you make bad or mediocre decisions but end up with a great outcome. They both happen because the world is too complex to allow 100% of your actions dictate 100% of your outcomes. They are mirrored cousins, driven by the same thing: 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.

In investing, a huge amount of effort goes into identifying and managing risk. But so little effort goes into doing the same for luck. Investors hire risk managers; no one wants a luck consultant. Companies are required to disclose risks in their annual reports; they’re not required to disclose lucky breaks that may have led to previous success. There are risk-adjusted returns, never luck-adjusted returns.

Here’s why Stephen Hawking never won the Nobel prize in physics

It takes decades to build the scientific equipment to test theoretical discoveries; to put this into context, Einstein’s theory of gravitational waves in space, which he first proposed in the 1920s, was only recently proven in 2016.

One of Hawking’s most important finds was “Hawkings Radiation,” the theory that black holes are not completely black after all, but emit radiations that ultimately cause them to disappear. The issue is, the technology needed to observe this radiation will take years and cost millions before Hawking’s theory can ever be verified.

Curated Insights 2018.03.11

Warren Buffett is even better than you think

What makes Buffett special, however, is that he has outpaced the market by a huge margin, even after accounting for those profitability and value premiums. The per-share market value of Berkshire has returned 20.9 percent annually from October 1964 through 2017, according to the company. That’s an astounding 9 percentage points a year better than a 50/50 portfolio of the Fama/French profitability and value indexes for more than five decades.

It’s a feat that can’t be dismissed as mere luck. For one thing, Buffett has been shockingly consistent, beating the 50/50 profitability/value portfolio during 40 of 44 rolling 10-year periods since 1974, or 91 percent of the time. Also, Buffett’s margin of victory is “statistically significant,” as finance aficionados would say, with a t-statistic of 3.1. That’s a fancy way of saying that there’s an exceedingly low likelihood that his outperformance is a result of chance.

How Amazon can blow up asset management

In addition to its home page, Amazon is rich with the most important resource in asset management: trust.

Amazon’s hidden advantage is its ruthless commitment to per customer profitability. I’m willing to bet that the firm has our number. It knows our lifetime value as customers and how we stack up against our cohorts by age, zip code, film preference, etc. Similarly, Amazon has shown that it doesn’t hesitate to fire unprofitable customers who abuse the return privilege. If it exercises the same discernment in avoiding the worst clients, incumbent asset managers stand to lose. Amazon has no legacy costs and no legacy relationships in asset management. Furthermore, it will not plead for such relationships. If you’re a 3rd party fund manager, for instance, getting on Amazon’s platform will be like the Godfather’s offer you can’t refuse. To me, asset management is the type of utility business that Amazon could easily disintermediate, for both its own benefit and the benefit of average investors worldwide. If you thought the overbuilt status of bricks and mortar retailing provided the kindling to the Amazon explosion in retail, the abundance of asset managers (especially active asset managers) provides the uranium for an apocalypse that could be much worse.


Lloyd Blankfein’s big, tricky, game-changing bet

Blankfein insists such pessimism is unwarranted in the long run. Within five years, he thinks, Marcus has the potential to dominate the refinancing of credit card debt by offering clients interest rates that are half of the penalties charged by card issuers. “The big banks have no incentive to do this — to offer a product that competes directly with their credit cards,” he says.

Blankfein insists investors will once again favor Goldman because the market forces behind its model are timeless. “We buy things from people who want to sell and sell things to people who want to buy, when in the real world, those buyers and sellers don’t usually match up,” he says. “Those things have been going on since the Phoenicians.”

Why Spotify won’t be the Netflix of music

Licensing deals are negotiated every couple of years, so investors will have to wait for the next chance to strike a new bargain. Growing bigger should help Spotify cut incrementally better deals, but won’t resolve the basic problem that ownership of must-have content is concentrated in so few hands. The big three plus Merlin accounted for 87% of songs streamed on Spotify last year.

But music is different: Apart from the concentration of rights ownership, new albums don’t have the same marketing pull as a new TV series. Spotify’s prospectus argues that “personalization, not exclusivity, is key to our continued success.” Competing with the record labels to get a better deal just doesn’t seem a viable option.

Why software is the ultimate business model (and the data to prove it)

The Demand for Software is very strong and stable — Spend on software has grown at ~9% for about a decade. Looking forward Gartner estimates show that the Software category is expected to grow 8–11% versus the U.S. economy at 2–3% and broader technology spending at 3–4%. Software is a GOOD neighborhood to live in.

Signals from the Stock Market: “In the short term the market is a popularity contest; in the long term it is a weighing machine.” — Warren Buffett. Over many years, the market reflects the true substance of a business — here you can see that over the last 15 years, a broad basket of software companies has created meaningfully more value than a broad basket of businesses.


Analysing software businesses

Business models are increasingly moving to SaaS business models because it benefits the customer. Even though the total cost of ownership of the software between the two is similar, the cash flow profile for the customer is different. SaaS shifts laying out cash for a license (capex) to an ongoing pay-as-you-go model (opex).

Investors also prefer SaaS models for two main reasons: 1. Higher predictability of future cash flow – SaaS has higher recurring revenue than license model. This provides a more consistent stream of cash flow with less ‘renewal’ risk at the end of every license. 2. Cost structure – the larger the upfront license cost, the larger the sales team required. SaaS models usually have a lower sales and distribution expense than license models.

Another reason SaaS businesses are popular with PE is because software economics match the return profile of of both VC and PE investors. Firstly, the original product with a fixed cost base plus increasing returns to scale earns a high ROIC and can scale with little capital. This matches the low-hit / high multiple return rate VC crave as they can pick the correct product and then sale with little marginal cost. PE then acquires from VC and provide the capital to acquire new products to bundle with the original offering. This strategy also matches the return profile of PE as they can acquire and add various products to the platform over the 5-7 average holding period of PE portfolio companies. Although the economics are not as good as VC stage due to the capital required, the risk is relatively lower as you have product-market fit and sticky customers.

‘Success’ on YouTube still means a life of poverty

Breaking into the top 3 percent of most-viewed [YouTube] channels could bring in advertising revenue of about $16,800 a year. That’s a bit more than the U.S. federal poverty line of $12,140 for a single person. (The guideline for a two-person household is $16,460.) The top 3 percent of video creators of all time attracted more than 1.4 million views per month.

Ideas that changed my life

Room for error is underappreciated and misunderstood. It’s usually viewed as a conservative hedge, used by those who don’t want to take much risk. But when used appropriately it’s the opposite. Room for error lets you stick around long enough to let the odds of benefiting from a low-probability outcome fall in your favor. Since the biggest gains occur the most infrequently – either because they don’t happen often or because they take time to compound – the person with enough room for error in part of their strategy to let them endure hardship in the other part of their strategy has an edge over the person who gets wiped out, game over, insert more tokens, at the first hiccup.

Your personal experiences make up maybe 0.00000001% of what’s happened in the world but maybe 80% of how you think the world works. People believe what they’ve seen happen exponentially more than what they read about has happened to other people, if they read about other people at all. We’re all biased to our own personal history. Everyone. If you’ve lived through hyperinflation, or a 50% bear market, or were born to rich parents, or have been discriminated against, you both understand something that people who haven’t experienced those things never will, but you’ll also likely overestimate the prevalence of those things happening again, or happening to other people.

Curated Insights 2018.03.04

The #1 reason Facebook won’t ever change

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

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

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


Netflix

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

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

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

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

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

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

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

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

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

Hidden profits in the prescription drug supply chain

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

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


Sergio Marchionne’s final lap

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

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

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


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

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

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

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


Dyson bets on electric cars to shake up industry

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

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


SpaceX joins race to make web truly worldwide

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

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


Driverless cars: mapping the trouble ahead

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

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


Eyes in the sky: a revolution in satellite technology

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

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

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

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

The number

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

Stocks are more similar to bonds than you think

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

Companies pay workers to get savvier with money

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

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

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