Curated Insights 2018.06.24

Tails, you win

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

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


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

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

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

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

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


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

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

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

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

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

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

Google’s half-billion bet on JD.com

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


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

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


Google is training machines to predict when a patient will die

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

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

Adobe could be the next $10 billion software company

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

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


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

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

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

What’s so special about 21st Century Fox?

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

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

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


Disney tests pricing power at theme parks

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

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

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

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

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

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

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

Japan robot makers outperform Europeans in profitability

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

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


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

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

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

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

Why Japan’s sharing economy is tiny

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

Indonesia ecommerce through the eyes of a veteran

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

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

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


Malaysia’s economy more diversified than thought

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

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

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


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

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

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


Study: Charts change hearts and minds better than words do

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

Curated Insights 2017.12.03

A dynamic knowledge tool to understand the issues and forces driving transformational change across economies, industries, global issues and the Forum’s system initiatives.

How to tame Google, Facebook, Amazon, and Apple

The problem with price regulation is that Google doesn’t charge high prices—at least not to consumers, the traditional victims in monopoly cases. The company initially helped wipe out the profitability of newspapers and magazines, in part, by undercutting the price of print advertising. These days, however, Google can charge hefty prices to advertisers because it controls so much inventory and user data. Advertisers can feel they have no choice but to pay up, while consumers pay precisely zero to do searches or send emails.

Amazon is a “cheetelephant,” said one analyst: an elephant that runs as fast as a cheetah. It’s considerably faster than the regulators and lawmakers who have been caught flat-footed and are now wondering what, if anything, to do about its increasing market power, from books to groceries to moviemaking.

“If you look at the business models of these firms, none of these is a predatory pricing model. These firms are making a lot of money doing what they’re currently doing,” said Penn’s Hovenkamp. Besides, he said, “there are constantly new entrants” that would prevent a company from earning monopolistic profits. For antitrust enforcers, the problem is that by the time you know for sure whether a company predatorily drove rivals out of business, it’s too late to prevent it.

Facebook, in other words, is damned if it does censor and damned if it doesn’t. How is this likely to evolve? One possibility is that Facebook will tire of taking the heat and voluntarily submit to government regulation. A regulated Facebook would still have to employ people and algorithms to scour its website of forbidden materials, as it does today, but at least it could point the finger at lawmakers and regulators if questioned about its choices. The same would go for Google and some companies not covered here, such as Twitter.

It’s a good bet that there will be more such orders in coming years. Governments want money, and the four tech giants have a lot of it. In the meantime, while trying to come up with a better tax system, Europe is toying with the idea of taxing the tech companies’ revenue rather than their profits. The reasoning is that revenue is harder to manipulate. But revenue is a crude measure of a company’s ability to pay taxes. Revenue-based taxation would be too hard on companies with lots of revenue but little profit, and too easy on companies with little revenue but lots of profit.

Under an apportionment system, each country is still permitted to set its corporate tax rate however it chooses. But it will be able to charge its rate only on its little slice of the company’s global profit—a slice that’s determined by an agreed-upon formula. A country can no longer grab a bigger piece of a shrinking corporate-tax pie by cutting its rate below other countries’. In one stroke, the race to the bottom in tax rates is cut short.

Getting low-tax countries to go along with an apportionment system would be tough, though. No country wants to give up what makes it special. So something like the current tax system, albeit with fewer loopholes, is likely to persist for at least awhile. Apple, Google, Facebook and Amazon will keep finding ways to pit countries against one another.


Why Tencent Could Become an Advertising Powerhouse Like Facebook

Tencent’s ad revenue could more than double to $11.4 billion by 2019, according to researcher eMarketer. The company is estimated to increase its market share in China’s digital ad space to 15 percent from about 9 percent, eMarketer said.

Social advertising, which relies on information from a user’s network, is still a nascent business in China. The model that drives Facebook only accounts for about 10 percent of mainland digital marketing with e-commerce and search ads still taking the lion’s share. Lau expects that to change. “Social advertising can play a larger role,” said Lau. “In China, we are kind of pioneering the categories” of that.

So Tencent’s chosen to exercise restraint, usually showing just one ad per day on WeChat’s “Moments”, a function similar to Facebook’s news feed, capping inventory by intention. That’s why it earns just $2.10 per daily active user on WeChat, versus Facebook’s $30.10, Morgan Stanley estimates.

To do that, it’s enlisted an army of more than 250 computer scientists to expand in artificial intelligence, focusing on natural language processing, image recognition and user behavior prediction. That investment is showing up in some areas: Tencent worked with BMW to target high-end users based on their friends and location logs, sending them WeChat ads through which they could book test drives. The end game is converting ads into purchases, which is why the company’s exploring also hotels, dining and property, Lau said.


How Tencent could help Snapchat

Integrating gaming into Snapchat might be a good idea – not just because it creates more ways to generate revenue, but also because it can enhance user engagement. Globally, more people watch gaming videos and streams than HBO, Netflix, ESPN, and Hulu combined. As Snapchat strives to add users globally, it would be smart to tap into the millions of gamers worldwide who are already spending hours each day playing games, many of which Tencent has invested in.

“There is a strong likelihood that the redesign of our application will be disruptive to our business in the short term. We’re willing to take that risk for what we believe are substantial long-term benefits to our business.”


Amazon focuses on machine learning to beat cloud rivals

The industry has turned into a race to provide customers tools and functions to use that data in new ways. Those tools are helping speed the transition to the cloud, since companies that don’t have access to them will be at a competitive disadvantage, Jassy said. “We are in a transition stage right now. Relatively few companies will own their own data centers, and those who do will have significantly smaller footprints. That means all of that data is moving to the cloud.”

The cloud computing market will grow to $89 billion in 2021, up from $35 billion today, according to technology research firm Gartner Inc.


Amazon AWS: Is that what the second headquarters is about? Asks Goldman

“While Amazon has never discussed any plans for a spin or any HQ2 plans relative to AWS, it is possible that the location of the new headquarters could provide some insight into the way management is thinking about the positioning of AWS.”

Terry’s curiosity is piqued by the fact that Amazon increasingly competes in the same industries that are customers for AWS, including gaming, healthcare and life sciences. Presumably, a separation of AWS might lessen the conflict there. Terry sees AWS being worth $430 billion, on a sum-of-the-parts basis, equaling 60% of Amazon’s enterprise value.


Broadcom could bid as much as $100 for Qualcomm and still see a payoff, says Canaccord

We assume Qualcomm settles its licensing dispute with Apple with Apple paying roughly half of what it previously paid Qualcomm for iPhone royalties. We also assume Qualcomm settles its dispute with Huawei or the other large OEM currently not paying Qualcomm royalties. We believe Broadcom management has solutions for Qualcomm’s disputes as part of its reasoning to make a bid for Qualcomm, but we have used these assumptions based on our Qualcomm scenario analysis used for our Qualcomm price target in our last published Qualcomm note. We also assume $500M in synergies achieved between Qualcomm and NXP in our scenario analysis including NXP. Further, we assume a 4% interest rate on combined debt for an acquisition with NXP and 3.5% for an acquisition without NXP given larger debt levels needed if the acquisition includes NXP. We also assume $1.5B in F2019 synergies between Broadcom in Qualcomm and a combined company tax rate of 15%.


Beyond Tesla’s semi truck: The future of trucking and transportation

We are currently entering a period of a rapid change in our transportation systems. And as I see it, it’s the innovator’s dilemma playing out in the wild: Incumbents like General Motors are moving too slowly to adapt to an all-electric future—wasting billions of dollars on stock buybacks—while upstarts like Tesla, unencumbered by legacy business models, are forging a path into a clean, fully-electric, fully-autonomous future. (GM has spent almost $17 billion in the last several years buying back its stock, three times what Tesla has spent building Gigafactories.)

One is that the cost of trucking falls by at least 50%, if not more. No driver, double the passive productivity, and in essence, you eliminate most of the safety problems. And by the way, if you apply this [autonomous] technology, many of the concerns we have from a safety standpoint about large trucks go away and you can make the trucks bigger. So, the costs fall at least in half. Transit time falls at half too, because you’re not waiting.

Let’s look at it from a technical standpoint. There are two competencies that keep trucking firms alive. The first one is their ability to match demand and supply; which is very important, and the second is their ability to manage drivers. There’s a modest competency with respect to equipment, but it’s not that important. Well, in the first place, if you if you eliminate the drivers, you eliminate half of the value-added that the trucker provides. And second, if you go to integrated big data, the business of matching capacity to demand becomes much easier. So, what it does is it either eliminates, or dramatically changes the principal competencies of whatever we call this entity which we now call “trucker” provides to the marketplace. So it’s big, big changes.


Why Tesla’s fuel efficiency advantage won’t last

At the early part of the 2000’s trucks getting 5 mpg were common. Today’s fleet is more like 7 mpg. That two miles per gallon increase means diesel used falls from 20,000 gallons a year down to under 15,000 gallons. Best-in-class trucks today might approach 9-10 miles per gallon. That three mpg increase versus fleet average (presumably what Tesla used in its cost calculator) is another 30% drop in fuel use, down to 10,000 gallons. The SuperTruck programs that get 12 or more mpg, (using many of the same aero techniques that Tesla’s Semi uses) would use around 8,000 gallons of fuel. In other words the opportunity to lower the Tesla cost of ownership with fuel savings is currently 15,000 diesel gallons a year, but will soon enough be only half that, using current line-of-sight technologies. At current fleet average diesel costs the savings opportunity on 100,000 miles per year is $37,500 per truck. At current best-in-class the available pool of offset-able fuel cost is $25,000. On future trucks, perhaps not too far distant from Tesla’s launch, is only $20,000 per year. All this assumes you can run a truck 100,000 miles a year in 300 to 500 mile increments.

The future difference between Tesla’s astonishing 19 mpg equivalent and the SuperTruck 12 mpg is only 3,000 gallons a year of diesel equivalent. Compared with the 7,000 gallons per truck per year already in the diesel improvement pipeline, that 3,000 gallons doesn’t look as compelling.


Inside the revolution at Etsy

Inside Etsy, Mr. Silverman’s reorganization has upended parts of the company once considered sacrosanct. Last month, Etsy changed its mission statement. Gone was a verbose commitment “to reimagine commerce in ways that build a more fulfilling and lasting world.” Instead, the mission was reduced to just three words, “Keep commerce human,” accompanied by a spreadsheet outlining its goals for economic, social and ecological impact. And because remaining a B Corp would require the company to change its legal standing in Delaware, where it is incorporated, Etsy will let that certification lapse.


Paytm aims to become largest full-service digital bank

“Digital payments was our entry point, we want to become a vertically-integrated financial services company.”

Payments banks can accept deposits and remittances but cannot lend. Paytm is one of less than a dozen entities that got permits to start payments banks to bring financial services within easy reach of about a fifth of India’s 1.3 billion people who do not have access to organized financial services.

Paytm Payments Bank is majority-owned by Sharma. One97 Communications, which is backed by Alibaba Group Holding, Ant Financial Services and others, holds the remaining 49 percent. The payments bank morphed out of Paytm’s digital wallet which got a huge boost and amassed over a hundred million customers after India took its high currency bills, totaling nearly 90 percent of the value of cash, out of circulation last November.

Sharma may have found a way around the regulatory hurdles that bar lending. One97 Communications will introduce a charge card and offer monthly installment-based loans, he said. “We will launch share trading and insurance products very soon,” said Sharma. “We want to become an Internet-age financial services company.”

Business lessons from Ben Thompson of Stratechery

“Zero distribution costs. Zero marginal costs. Zero transactions. This is what the Internet enables, and it is completely transforming not just technology companies but companies in every single industry.” “Aggregation Theory is a completely new way to understand business in the Internet age.”

“instead of some companies serving the high end of a market with a superior experience while others serve the low-end with a “good-enough” offering, one company can serve everyone…. it makes sense to start at the high-end with customers who have a greater willingness-to-pay, and from there scale downwards, decreasing your price along with the decrease in your per-customer cost base (because of scale) as you go (and again, without accruing material marginal costs). Many of the most important new companies, including Google, Facebook, Amazon, Netflix, Snapchat, Uber, Airbnb and more are winning not by giving good-enough solutions to over-served low-end customers, but rather by delivering a superior experience that begins at the top of a market and works its way down…”

“Apple and Amazon do have businesses that qualify as aggregators, at least to a degree: for Apple, it is the App Store (as well as the Google Play Store). Apple owns the user relationship, incurs zero marginal costs in serving that user, and has a network of App Developers continually improving supply in response to demand. Amazon, meanwhile, has Amazon Merchant Services, which is a two-sided network where Amazon owns the end user and passes all marginal costs to merchants (i.e. suppliers).”

“Once an aggregator has gained some number of end users, suppliers will come onto the aggregator’s platform on the aggregator’s terms, effectively commoditizing and modularizing themselves. Those additional suppliers then make the aggregator more attractive to more users, which in turn draws more suppliers, in a virtuous cycle. This means that for aggregators, customer acquisition costs decrease over time; marginal customers are attracted to the platform by virtue of the increasing number of suppliers.”

“Breaking up a formerly integrated system — commoditizing and modularizing it — destroys incumbent value while simultaneously allowing a new entrant to integrate a different part of the value chain and thus capture new value.”


Active vs. passive vs. Amazon et al.

“Sectors such as finance, information technology, media, and pharmaceuticals — which have the highest margins — are developing a winner-take-all dynamic, with a wide gap between the most profitable companies and everyone else.”

“I have long described Amazon as a Field of Dreams company, one that goes for higher revenues first and then thinks about ways of converting those revenues into profits; if you build it, they will come. In coining this description, I am not being derisive but arguing that the market’s willingness to be patient with the company is largely a result of the consistency with [which] Jeff Bezos has told the same story for the company, since 1997, and acted in accordance with it.”

“These models have an in-built structure where they are going to tip into winner-take-all areas. The cost of adding a new user gets smaller and smaller the bigger you get. [This starts] creating a competitive advantage that gets harder and harder to bridge.”

It’s not unusual for a few stocks to drive broader market performance in a given year, but we would be foolish to ignore that it has been the same several stocks quite frequently in recent years. Facebook, Apple, Amazon, Netflix, and Google are responsible for roughly 20% of the S&P 500’s performance this year, and generated more than the entire return of the index in 2015.


The secret to tech’s next big breakthroughs? Stacking chips

The advantage is simple physics: When electrons have to travel long distances through copper wires, it takes more power, produces heat and reduces bandwidth. Stacked chips are more efficient, run cooler and communicate across much shorter interconnections at lightning speed.

Chip stacking enables totally new capabilities too. Some phone cameras stack an image sensor directly on top of the chip that processes the image. The extra speed means they can grab multiple exposures of an image and fuse them together, capturing more light for dim scenes.

But Mr. Dixon-Warren says the spread of 3-D chips is rapid and their takeover inevitable. A decade ago, this technology was limited almost exclusively to university labs; five or six years ago, it was still hard to find commercial examples. But now it’s popping up all over, in applications like networking and high-performance computing and in high-end wearables like the Apple Watch.


How does Costco sell 18-year-old single malt Scotch for $38?

“Costco has a volume deal with [spirits] companies including Edrington and Diageo. They agree to buy a certain amount of product at a certain price, which is far lower than everyone else is paying. For products like Johnnie Walker Blue or Macallan, it’s virtually impossible to beat Costco on price.”

“If Costco can control the importation of the whisky, get someone to distribute it to them at cost (or at very slim single-digit margins due to high volume) and then sell it at very low margins, then they’re golden.”

Finally, one reason rarely considered for why Costco might be able to offer better pricing is proof. Typically, whisky connoisseurs would want that 25-year-old Scotch to have some decent heft after all those years of concentrating in barrel. Alcohol is a conduit for flavor, after all. But all Kirkland Signature Scotches are sold at 80 proof, meaning that these whiskies are watered down to the absolute lowest legal limit and, thus, Costco is able to empty barrels into way more bottles.


Big oil and auto makers throw a lifeline to the combustion engine

The new lubricants are meant to help auto makers build smaller, turbocharged engines that are still quite powerful, resulting in efficiency gains close to 15% compared with older models. Optimizing internal combustion engines could boost efficiency by an additional 25%—a calculation that might tempt auto makers from spending more on electric-vehicle technology. Other efforts to enhance performance include adding gears to transmissions and making vehicles more aerodynamic.

The gains from engine oil alone are limited, however. Industry experts say the latest lubricants typically boost fuel economy by less than 1%, primarily by reducing the amount of energy needed to pump a piston. Even so, it is a highly cost-effective solution that adds up when spread across millions of vehicles.


‘It’s beautiful’: This Toronto startup is investors’ secret weapon to beating the market

Legal experts say investors may be risking more than their capital when using such alternative data since case law hasn’t yet determined what crosses the line into privacy violations or insider trading, but it’s a risk a growing number of financial institutions are willing to take, especially since in Apache’s case, and many others, it has paid off.

“That is the original alpha source, knowing something the market doesn’t know. It’s beautiful,” he said. “If you can come to them with a genuine information advantage, where they can know something their peers in the market do not know that’s tradable, that’s hugely valuable.”

Quandl is particularly interested in companies that produce what it calls “exhaust” data, or data collected as part of a company’s normal operations without intending to turn it into a revenue source. For example, insurance companies keep records of how many new car insurance policies they sell, as well as which vehicle manufacturer’s model is being insured, which happens to be a great predictor of new car sales before the automakers release the data themselves.

But Quandl faces a dilemma after convincing suppliers to sell their data: the more clients the company sells the data to, the less of an investing edge it provides, making it less valuable. To solve that problem, Quandl uses the data to build a predictive model to make an educated guess about how much money could be invested before the data loses its advantage and then sells it to a limited number of clients accordingly.


About 11% of land in Japan is unclaimed

That’s about 41,000 square kilometers (16,000 square miles), which is equivalent to the size of Japan’s southwestern island of Kyushu, or almost as large as Denmark. By 2040, land equivalent to Japan’s second-largest island of Hokkaido will be unclaimed or abandoned, according to a panel of experts and government representatives. This will cost the nation roughly 6 trillion yen ($54 billion) over the period 2017-2040, including lost development opportunities and uncollected taxes, the panel says.

“Land prices are falling in the depopulating regions,” Yamanome said. “Not only is it impossible to make money by owning some land, but also you can’t get rid of it because regional real estate markets are stale.”


Great products vs. great businesses

A product is something that solves someone’s problem. A business is a product that works so well that people will pay more than it costs to produce.

But losses come in different flavors. There is a difference between a company that loses money because it’s investing in the infrastructure needed to become a profitable company, and a company that loses money because it can’t charge customers a price that reflects what it costs to run the business. But we often conflate the two, treating all loss-making startups with a sense of, “It’s OK, they’re growing.”

Companies are staying private longer than they used to. So venture investors that specialize in the early phase of big-losses-because-we’re-investing-in-what-it-takes-to-build-a-profitable-business have found themselves holding mature companies that in a different era would have been passed onto investors who demanded a sustainable business model with profits. In any other era, Uber, Airbnb, Pinterest, and others all would have been public companies by now. And public markets almost certainly wouldn’t let losses pile up for as long as they have. We’ve seen this with Blue Apron and Snap, whose shares have fallen between 50% and 70% since going public just months ago. Both make amazing products that attracted armies of users, which VC investors oogled over. But public investors took one look at their business models and said, “What the hell is this?!” Who knows what that means for their future as standalone companies.


Pricing power: Delighting customers vs mortgaging your moat

The problem with this source of pricing power is that it comes with an off balance sheet liability. A sort of “negative goodwill” that grows every time you increase prices. While the profits might roll in for awhile, one day the customers will revolt. At the very least, the perceived excessive pricing of the well water will create a huge incentive for customers to try any new competitor that comes to town. While the high pricing makes it look like the company has a competitive advantage, in fact the excess returns are being created by a process that increases the likelihood of a successful competitive assault sometime in the future.


Lessons from a legendary short seller

“Because I never wanted to get up in the morning hoping that things would be getting worse. All intellectuals I think — and I don’t use that as a particularly flattering term — but all intellectuals tend to have a pessimistic streak.”

“I would forget the shorting. I think it’s over. It’s over for one simple reason: If shorts start working, that is, stocks go down for any sustained period of time, a great many people who are not now shorting will start shorting. There is a limited supply of stocks to borrow to sell short. Those stocks that are good shorts tend to be very obvious. As I’ve often said, I can predict with confidence that you’ll die. I cannot predict that you’ll be born, and so failure is analytically obvious and everybody piles into the same short. . . . I do believe if shorting really becomes profitable again, it’s going to become so crowded that most people won’t be able to borrow stock.”

Pulling iron from brain may offer hope in Alzheimer’s fight

The familiar metal is key to numerous brain functions, but too much of it is toxic. Researchers in Melbourne showed two years ago that iron levels in the brain can predict when people will get Alzheimer’s disease. Now, the team aims to show how removing excessive amounts with a drug called deferiprone can stave off the memory-robbing disorder.


Laptops are great. But not during a lecture or a meeting.

Laptops distract from learning, both for users and for those around them. It’s not much of a leap to expect that electronics also undermine learning in high school classrooms or that they hurt productivity in meetings in all kinds of workplaces.


Curated Insights 2017.09.24

Ferrari bets racetrack wins will lead to showroom sales

Ferrari’s financial success over the past 15 years has “been achieved on the back of Formula One,” the CEO said in March, adding that the company couldn’t afford many more losing seasons without suffering financially.

But there is little empirical evidence that winning races translates into increased sales. AllianceBernstein, a wealth manager, argues Ferrari doesn’t need Formula One. “There can’t be a soul on earth who doesn’t know that Ferrari makes fast red cars, with excellent technology and that it has a motor sport heritage,” AllianceBernstein wrote in a report last month, adding that Lamborghini, Porsche and other high-end brands have no trouble selling cars despite being absent from Formula One for many years.

While Ferrari doesn’t reveal its estimates for the financial and promotional benefits it derives from Formula One, Mercedes said that in 2016 it got the equivalent of $3 billion in advertising value from the team.

For years, the company limited its sales to no more than 7,000 cars annually to stoke demand. Now, Mr. Marchionne plans to raise that limit to 10,000 in the coming years, while also moving Ferrari into new areas such as home furnishings and technology products.


Liu Qiangdong, the ‘Jeff Bezos of China’, on making billions with JD.com

It was just three years ago that China overtook the US as the largest e-commerce market — but last year China’s total online retail transactions hit an estimated $750bn, nearly double the figure in the US. Most analysts predict China’s online retail market will more than double again by 2020, by which time Chinese online purchases are expected to exceed those of the US, UK, France, Germany and Japan combined.

The contradiction between Alibaba’s much larger market share and profits but smaller revenues is explained by the rivals’ different business models. Like Amazon, JD.com controls most of the supply chain and delivers goods from its own warehouses directly to customers, so it counts online sales as revenues. Alibaba, by contrast, is essentially an internet platform and payment system for other companies and individuals selling to consumers online and earns the bulk of its revenue from advertising.

“I was the first and only stall in that market to put price labels on everything and give official receipts; from day one I never sold any counterfeits and I soon had the best reputation,” he says. “A lot of rich people in China cannot sleep well because they did too many wrong things but I never made any dirty money ever so I can sleep very well.”

What’s the true TAM of search?

To truly appreciate the nature of information distribution, we need to think in a broader context and challenge some assumptions: what if “online advertising”, or even “advertising” is not the right way to measure the TAM (total addressable market) for the search engine business?

If we correctly define the role of search engines, we can see that what they are really designed to address is actually something much broader – “search cost”. Search cost is the biggest component of what economists label as “friction cost” in an economy and it can exist and be addressed in many different forms.

All of that excess rent is a form of marketing that brands and retailers pay to address “search cost”. In a purely online environment, the physical location is disintermediated and what companies would otherwise pay in excess rent in an offline setting would presumably get re-allocated in the form of Amazon commissions or Google keyword ads.

Actually, most of the time, new technological developments have a tendency to shrink the TAM as technology is usually deflationary (the search engine being an exception), so be careful when you see IR slides of tech companies where management takes an estimate of the market size today and declares that number as their company’s financial destiny – it most likely overstates the actual TAM.


Google Travel is worth $100 billion — even more than Priceline

Our estimate of $11.2 billion in Google travel revenue in 2016 would mean that travel accounted for 13 percent of Google’s total Google Segment revenue and 12 percent of the company total (includes the so-called other bets part of the business). Google’s total Google segment operating margin is in the low 30s, but the core AdWords business is likely much higher (meta would likely be in the 25 percent range).

Given a margin profile that is likely above Priceline and digital ad spend growing more than 20 percent per year, the value of the travel business would warrant a similar price-to-sales multiple as Priceline; off of 2016 results, Priceline trades at over 8x revenue. As mentioned earlier, using a 7x multiple on our estimated 2017 numbers for Google, the Google travel business could be worth as much as $100 billion or 15 percent of Google’s $650 billion market cap.

Online travel companies would like to diversify away from Google, but no other digital marketing tool offers the same commercial intent of a Google search.


Gaming sector primer

The gaming sector is the most attractive industry I see today due to: relative low price point and inelasticity; highly addictive products; cyclical defensive; ability for some to capture consumer surplus; consistent high margins and ROE. The downsides are: difficulty in developing new IP; high rate of reinvestment.

Imagine being able to sell $5 worth of coca cola to someone and $5000 worth to someone else, suddenly the need to build a massive horizontal distribution platform is terribly wasteful and your efforts are better spent capturing a smaller share of premium clients, which is made possible by the internet and ubiquitous mobile phones.

Today the gaming sector in China is dominated by mobile due to the ubiquitous nature of phones compared to the lack of platform penetration of console and to a lesser extent PC games. As a result, the two Chinese companies which dominate the gaming space, Tencent and Netease, which together control arond 80% market share, were able to leapfrog the traditional console/pc game market and focus largely on mobile and are in my opinion global leaders at the art of capturing consumer surpluses.


The death of (many) brands

Companies with a trusted brand could earn excess economic returns so long as the cost of building the brand costs less than the premium consumers were willing to pay for a product due to the brand. Because brands have historically be very durable (notice the global brands that were built in the 1950 are still dominate today), they created an economic moat that caused these companies to generate outstanding returns for shareholders.

Costco leverages their scale to identify high quality, good value products and deliver them to consumers. This process reduces the value of brands and allows Costco customers to confidently buy non-brand products or products with limited brand recognition. In this way, Costco has managed to earn excess economic returns, even while selling the products in their stores at close to cost.

Now, however, the era of search cost brands is coming to an end. The moats are being breached. Over the long term, we do not believe that these types of brands will provide a significant competitive advantage to their owners and the companies will be forced to compete directly on quality and value instead of earning a return for selling reduced search costs.


China’s electric car push lures global auto giants, despite risks

From high-speed trains to wind turbines, China has long prodded American, European and Japanese companies to hand over their know-how in exchange for access to its exciting new market. Then Chinese companies have used that knowledge and lavish government support to take on foreign rivals. China wants the big players to share their electric car knowledge, too. The foreign automakers face new Chinese regulations that put heavy legal pressure on them to transfer electric-car technology to their local partners.

The joint ventures alone may not make China a leader in electric cars. G.M., Volkswagen and other major automakers have made regular cars with Chinese partners for decades, and China had hoped its automakers would learn how to make their own worldbeating brands. Instead, Chinese automakers grew comfortable making Chevrolets and Volkswagens for local drivers. Only recently have foreign automakers begun exporting Chinese-made cars to buyers back home.

More broadly, global automakers feel that they must grow in a country that has become the world’s largest car market, one almost as big as the American and European markets combined.


Materialize.X is using machine learning to disrupt the $300B engineered wood industry

A lot of engineered wood is created using an adhesive called urea-formaldehyde, which has recently been labeled by the FDA as a toxic carcinogen…The startup has created a patented non-toxic adhesive to serve as an alternative to urea-formaldehyde. Materialize.X plans to license to chemical companies, or engineered-wood manufacturers so they can make the adhesive on site, the method for making this adhesive.

…created software that uses machine learning to take in all those variables and make slight changes to the manufacturing process that can greatly improve the quality of the final product. Examples of these changes are adjusting the amount of adhesive used or increasing the pressure in the bonding process depending on the variables listed above.


The new Texas gold rush: Buying sand for fracking

Texas energy producers have typically bought the millions of pounds of sand that each well requires from mines located far from their drilling fields. After oil prices collapsed in late 2014, though, cost-conscious drillers reconsidered their well designs and recipes for the slurries they blast underground to unleash fuel from shale formations. Many West Texas drillers discovered that they could replace sand they had been shipping from mines 1,300 miles away in Wisconsin with finer grades found in dunes nearby. Doing so eliminates rail costs that sometimes are equal to or more than the sand itself.

The prospect of tens of millions of tons of Permian sand coming to market could drive down sand prices that have been rising nationally, Mr. Handler said. Analysts say that prices rose to as much as $45 a ton earlier in the year, from as little as $15 a ton last year.

Hedge-fund manager Daniel Loeb is among those betting that sand stocks will fall further. In an April letter to his Third Point LLC investors, Mr. Loeb cited the “important shift” from special sand mined in the Midwest to abundant sand within drilling basins, including West Texas.

Superpower India to replace China as growth engine

The number of people aged 65 and over in Asia will climb from 365 million today to more than half a billion in 2027, accounting for 60 percent of that age group globally by 2030, Deloitte said in a report Monday. In contrast, India will drive the third great wave of Asia’s growth – following Japan and China — with a potential workforce set to climb from 885 million to 1.08 billion people in the next 20 years and hold above that for half a century.

“India will account for more than half of the increase in Asia’s workforce in the coming decade, but this isn’t just a story of more workers: these new workers will be much better trained and educated than the existing Indian workforce,” said Anis Chakravarty, economist at Deloitte India. “There will be rising economic potential coming alongside that, thanks to an increased share of women in the workforce, as well as an increased ability and interest in working for longer. The consequences for businesses are huge.”


Why machine learning funds fail

The complexities involved in developing a true investment strategy are overwhelming. Even if the firm provides you with shared services in those areas, you are like a worker at a BMW factory who has been asked to build the entire car alone, by using all the workshops around you. It takes almost as much effort to produce one true investment strategy as to produce a hundred. Every successful quantitative firm I am aware of applies the meta-strategy paradigm. Your firm must set up a research factory where tasks of the assembly line are clearly divided into subtasks, where quality is independently measured and monitored for each subtask, where the role of each quant is to specialize in a particular subtask, to become the best there is at it, while having a holistic view of the entire process.


The case for & against cryptocurrencies (for those tired of all the noise)

The strongest cases for the existence of cryptocurrencies in my mind include: (1) allowing for a decentralized Internet in which value is accrued to infrastructure, protocols and applications that serve market needs; (2) allowing electronic trade across actors who may not know or trust each other without middlemen who take a heavy toll / tax on the transaction; (3) allowing for (the potential of) a more stable currency than one’s own government for citizens who may live under despotic or irresponsible regimes.

The simple case against cryptocurrencies includes three completely related factors: (1) powerful governments who won’t tolerate the loss of monetary control or illegal activities; (2) societal pressure to regulate cryptocurrency will increase as more people are duped, as more fraud is discovered, as more hacks occur and as more market participants collaborate to manipulate the value of the currencies themselves; (3) erosion of trust as first-time cryptocurrency participants get duped, lose money and develop skepticism for the asset.

There is a fascinating story in “The Ascent of Money” by Niall Ferguson in which Ferguson describes how the modern corporation emerged. About 400 years ago merchants from the Netherlands were sending ships to Asia in search of spices widely desired in Europe. More than 50% of all ships that sailed wouldn’t return so groups of people banded together and formed the Dutch East India Company to share the risks and the rewards of their conquests.

This is amongst the first examples of the modern corporation. The company brought back spices and reaped profits that went back into building more ships and sailing back to Asia. The company didn’t distribute the profits to individual shareholders who instead were issued the modern form of a share certificate for their ownership. Because they couldn’t monetize this ownership they started selling shares of their ownership to others, thus perhaps the first stock market and transaction dating back to the early 1600s.

No sooner did people start selling shares in these companies than market speculators started spreading false stories about merchant ships being sunk or about large spice conquests to drive up or down the price of these stocks through false information and manipulation. So oversight became necessary to establish trust in the value of these assets.


What Jamie Dimon got wrong about bitcoin and tulips

Mackay confused two distinct eras. He reports stories from around 1610 about high prices paid for individual bulbs. What he failed to realize is that people were not paying for single flowers, but for the entire breeding stock — or a significant portion of it — of popular new tulip varieties. People have continued to pay higher inflation-adjusted prices for new tulip and lily bulbs to this day.

A quarter century later, a futures market grew up around fractional interests in low-priced, ordinary tulip bulbs. In premodern Europe investment returns were very high, 20 percent or 30 percent per year on low risk investments, but laws and customs prevented anyone not in the merchant class from taking advantage.

Holland accidentally created a loophole by allowing contracts for fractional interests in tulip bulbs for the convenience of the industry. These were needed because the price of popular new bulbs was higher than even rich individuals could afford. In the early 1630s ordinary people discovered that these contracts could serve as money to support business and investment. These contracts then became “monetized,” as happens to all assets used as bases for monetary activity. That means their value decoupled from the use value of the underlying asset and became determined by demand for money services.

By 1637, contracts for fractional interests of low-priced tulip bulbs had risen to 20 times the price of the actual bulbs, reflecting the explosion of economic activity they stimulated. In February 1637, the market collapsed; six weeks later it was outlawed.


What Jamie Dimon is missing about Bitcoin

It’s no secret that Bitcoin and other digital currencies may dramatically fall in value at any time. How can an asset whose value jumps by 20 percent some days, and which no one can accurately value, plausibly not also suffer huge declines? But that’s a long way from Bitcoin being a worthless fraud.

Of course, fiat currencies like the dollar have the backing of a sovereign nation. Digital currencies are obviously far more speculative, have been around for only a few years, and don’t have a government’s underlying support. But almost all currencies today are conjured up from nothing — the euro didn’t even exist 20 years ago — and their value is largely dependent on trust.

His firm conjured up its own currency: Chase Ultimate Reward points, its credit card loyalty program. Millions of customers have accumulated billions of points, trusting in Chase’s promise that this currency can be converted into cash or used for travel and other delights. And they hope that Chase won’t unilaterally choose to devalue them…

But new use cases for digital currencies are just starting to take shape. They are now being used to create value in the way that Silicon Valley has traditionally done so: regulatory arbitrage. Ride-hailing got its start avoiding onerous taxi medallion costs; Airbnb avoided hotel taxes and regulations; and YouTube played fast and loose with copyright rules.

Curated Insights 2017.07.23

The limitations of deep learning

…the only real success of deep learning so far has been the ability to map space X to space Y using a continuous geometric transform, given large amounts of human-annotated data. Doing this well is a game-changer for essentially every industry, but it is still a very long way from human-level AI.

To lift some of these limitations and start competing with human brains, we need to move away from straightforward input-to-output mappings, and on to reasoning and abstraction. A likely appropriate substrate for abstract modeling of various situations and concepts is that of computer programs.


Machines poised to take over 30% of work at banks, McKinsey says

Cognitive technologies — applications or machines that perform tasks once requiring human thought — are now cheap enough that banks can deploy them across operations facilitating trades or other capital-markets business. Automating tasks will “free up capacity” for staff to focus on higher-value work, such as research, generating new ideas or tending to clients.

Machine learning — which uses algorithms to identify patterns in large sets of data — can help sales and trading staffs understand positions faster and predict what flows will look like.

Natural language processing can perform legal and regulatory tasks by scanning through records, emails and recordings to translate them into structured data.

Cognitive agents can act as in-house personal assistants or service centers; think of help desks for trading staffs that have issues with their systems.

Robotic process automation — in which machines handle repetitive tasks — is particularly effective in banks’ middle offices, where it can help with end-of-day valuations and extract data.

Smart workflow tools — including document scanning and automated data entry — can speed the process of signing up new clients.

Netflix provided a new set of documentation, along with its customary earnings report, discussing how it accounts for its spending on content

Netflix surges 11%: sub adds crush estimates; discloses ‘content accounting’

“In continued success, we will deploy increased capital in content, particularly in owned originals, and, as we have said before, we expect to be FCF negative for many years. Since our FCF is driven by our content investment, particularly in self-produced originals, we wanted to provide some additional context on our content accounting at our investor relations website.”

Amazon Prime and other subscription businesses: How do you value a subscriber?

“[Understanding] the actual unit economics in the underlying business…requires analyzing the ‘true’ contribution margin of the business; not simply looking at gross or net revenue and the proper contra-revenue treatment, and not even looking just at gross margin as defined by the company. Many companies embed costs that are truly variable (for instance customer support, marketing, credit card processing) below the gross margin line. If you want to know if the business model truly hunts, you must pay careful attention. Otherwise, you may have simply found a company that is simply selling dollars for $0.85.”


Amazon is buying products from some US retailers at full price to build global inventory

The new program, which follows a similar rollout in Europe, is the latest move by Jeff Bezos to build up a complete catalog, even if Amazon can’t make much money on the products in question. In some cases, Amazon is approaching these third-party merchants after the manufacturer has declined to distribute the products through Amazon.

“When items are unavailable in a particular geography, we provide customers with selection from another marketplace. This offers customers a wider selection of great brands and helps sellers increase sales.”


Vanguard, the Amazon of asset management

What Vanguard’s founder, Jack Bogle, and company do have going for them is a unique ownership structure. Fund investors double as the shareholders. This allows Vanguard to essentially operate at cost, spending incremental profit on lower fees.

Vanguard has benefitted from a killer combination in recent years—low cost and quality performance. This is because although the firm distributes ETFs and actively managed funds, they specialize in passive, index-based investing—a style which has surged in popularity amid widespread underperformance across the active manager community.

Investing is a game of probability. Why would anyone want to pay 6x more for a product with a 90% likelihood of being inferior? The average actively managed mutual fund fee is 0.72%—6x higher than Vanguard’s 0.12% annual fee. And roughly 90% of those funds are underperforming Vanguard’s ultra-cheap option.


In urban China, cash is rapidly becoming obsolete

Ant Financial and Tencent were set to surpass credit card companies like Visa and Mastercard in total global transactions per day in the coming year. The key is that both companies are able to provide payments on the cheap, partly by allowing smaller vendors to make use of a simple printout of a QR code or their phone, instead of an expensive card reader. A back-end system that stores a record of user accounts, instead of having to communicate with a bank, also keeps costs down.

As the country builds its entire consumer economy around two private smartphone payment platforms, it is slowly locking out people unable to get onto those networks, and locking itself into those companies.