We don’t have the scientific tools we need to stop Alzheimer’s. There hasn’t been a new drug for it approved in more than 15 years. That’s in part because it’s so hard to run clinical trials for this disease; the average clinical study for Alzheimer’s takes 4 to 8 years, versus just 1.5 years for a typical study of cardiovascular disease, and is also much more expensive to run.
For one thing, it’s difficult to identify qualified people early enough in the disease’s progression who are willing to participate. People might experience symptoms but not realize they have the disease, and simply not bother to see a doctor. Many doctors have only a limited time with each patient, and they don’t make it a priority to talk about early Alzheimer’s—especially if the person isn’t showing any symptoms.
But suppose the patient makes it to a doctor and the subject of Alzheimer’s does come up. There’s still no cheap, effective way to diagnose the disease. The definitive tests are expensive or invasive—one of them requires a spinal tap, which involves using a needle to puncture your spinal cord—and the doctor may not order them. If she does, her patient might not want to take them. Many people don’t want to find out if they have the disease earlier, because there’s no way to treat it.
As a result, we found that 80 percent of trials don’t meet their recruitment goals on time, which greatly increases the cost of running a trial for pharmaceutical companies. And of all the patients in the healthcare system who could be eligible to participate in a clinical trial on Alzheimer’s, only 1 percent actually do.
Imagine we could simulate the universe where each time you are born to different set of parents with a different genetic makeup. Sometimes you are born a man. Sometimes you are born a woman. Sometimes black. Sometimes white. Sometimes smart. Sometimes not. Etcetera etcetera. What would you do to have the highest probability of becoming financially secure regardless of your background?
If you wanted to re-state this question more simply, it is: How do you get rich without getting lucky?
The jump from product-user fit to product-market fit is no trivial leap. Skipping what to focus on during the product-user fit stage and prematurely racing to spark the market adoption can actually decelerate your path to product-market fit. Forcing growth on a product that isn’t yet ready for broader adoption will not ultimately convert to a market of highly retained, happy users. And if you don’t listen to the early power users closely enough, you may never discover the insights that get you to a world-class product.
Power users are the biggest sign of product-user fit. Making the leap from product-user fit to product-market fit is about listening to these users to evolve your product to attract more users. When exploring products that have only been in market for a short amount of time, the behavior of power users is often more interesting and important than any aggregate metrics. If the goal is to “make something people want,” then continuously talking to and observing early power users is the only way to really understand what drives both user retention and non-user activation.
First, we think Berkshire’s broad diversification provides the company with additional opportunities and helps to minimize losses during market and/or economic downturns. Berkshire remains a broadly diversified conglomerate run on a completely decentralized basis, with a collection of moaty businesses operating in industries ranging from property-casualty insurance to railroad transportation, utilities and pipelines, and manufacturing, service, and retailing. The economic moats of these operating subsidiaries are built primarily on cost advantage, efficient scale, and intangible assets, with some of these businesses being uniquely advantaged as well by their ability to essentially operate as private companies under the Berkshire umbrella. The operating subsidiaries also benefit from being part of the parent company’s strong balance sheet, diverse income statement, and larger consolidated tax return.
Berkshire’s unique business model has historically allowed the company to–without incurring taxes or much in the way of other costs–move large amounts of capital from businesses that have limited incremental investment opportunities into other subsidiaries that potentially have more advantageous investment options (or put the capital to work in publicly traded securities). The managers of Berkshire’s operating subsidiaries are encouraged to make decisions based on the long-term health and success of the business, rather than adhering to the short-termism that tends to prevail among many publicly traded companies. Another big advantage that comes from operating under the Berkshire umbrella is the benefit that comes with diversification not only within the company’s insurance operations, but also within the organization as a whole. In most periods, it is not unusual to see weakness in one aspect of Berkshire’s operations being offset by the results from another or from the rest of the organization.
WeWork seems to be facing the traditional tradeoff: Stay private, keep control, but lose access to billions of dollars of funding, or go public, raise unlimited money, and have to act normal. If it does either of those things, that will mark a sort of end of an era. At the height of the unicorn boom, big tech companies could stay private without giving up the benefits of being public, or they could go public without taking on the burdens of being public. Now they might have to make hard choices again.
Over the years, we’ve also realized as we grow bigger, we have incredible economy of scale. If you were to aggregate all our U.S. stores [customers’ sales volume] we would be the third-largest online retailer in the U.S. Amazon is first, eBay second, and Shopify is a very close third. What that means is when we go to the payment companies, when we go to the shipping companies or go to anyone, we negotiate on behalf of more than 800,000 merchants. Instead of keeping the economies of scale for ourselves, we distribute [the benefits] to the small businesses. I think that’s why we have been really successful.
The newbies, born more recently, have turned a once-tidy business into a food fight. They include listed firms such as Meituan of China and Delivery Hero of Germany, Uber Eats (part of Uber), Ele.me (owned by China’s Alibaba), and privately held DoorDash, based in San Francisco, and Deliveroo, from London. For most of them, delivery is their core business, so they share their cut of the bill with riders as well as restaurants. This substantially broadens the market to restaurants offering everything from steak to Hawaiian poké bowls. But margins suffer. Funded largely by venture capital, they have thrown subsidies at customers, forcing their veteran rivals onto the defensive. To catch up, the veterans are investing in advertising and delivery networks—at a big cost. This week Grubhub and Just Eat reported slumping earnings, and Takeaway mounting losses, as they spent heavily to fend off the upstarts.
The only mouthwatering aspect of the delivery business is its potential size. According to Bernstein, a brokerage, almost a third of the global restaurant industry is made up of home delivery, takeaway and drive-throughs, which could be worth $1trn by 2023. In 2018 delivery amounted to $161bn, leaving plenty of room for online firms to expand; the seven largest increased revenues by an average of 58%. Their businesses support the trend of 20- and 30-somethings to live alone or in shared accommodation, with less time and inclination to cook. In China, by far the biggest market for food delivery, one-third of people told a survey that they would be prepared to rent a flat without a kitchen because of the convenience of delivery. Delivery also fits neatly with the gig-economy zeitgeist, alongside ride-hailing firms such as Uber, Lyft and China’s Didi.
Moreover, potential growth may be overstated. Subsidies make true demand hard to gauge. When delivery charges and service fees eventually rise, which they will have to if profits are to materialise, some customers may flee. In the meantime, cheap money lets firms undercut rivals but distorts incentives. The war of attrition could get even worse if giants like Amazon muscle in, as it has tried to do by buying a stake in Deliveroo (the deal is stalled at present because of antitrust concerns). Alibaba, Amazon’s Chinese counterpart, uses Ele.me as a loss leader helping drive traffic to its profitable e-commerce sites.
There have been numerous ecommerce 2.0 flameouts over the past decade (e.g. Gilt Groupe, Fab.com, Birchbox, Shoedazzle, Beachmint, One Kings Lane). Venture capitalists flocked to these businesses due to large addressable markets and strong top-line growth. To be fair, there have been some big winners (e.g. Wayfair) which can justify the VC game. But as Bill Gurley points out, innovations around pricing or distribution — think flash sales and subscriptions in a box — don’t represent core differentiation or sustainable competitive advantages. Additionally, these startups had access to hundreds of millions of VC funding and therefore weren’t forced to prove out the unit economics before scaling rapidly.
Farnsworth’s pitch to MoviePass: $25 million for 51% of the company, two seats on the five-member board, and a promise to drop the monthly subscription price, temporarily, from $50 to $9.95, with the goal of hitting 100,000 subscribers. If all went well, the next step would be taking MoviePass public. But Farnsworth’s plan worried Spikes; to him, $10 a month was too low. At that price MoviePass would start losing money when a subscriber used the service more than once a month.
In the US, the average price for a movie ticket is about $9; if a customer ordered a ticket every day for a month (the maximum the MoviePass plan allowed), it would cost MoviePass about $270, of which the subscriber’s fee would cover just $10. But in July 2017, the MoviePass board agreed to the deal. And on August 15, the price drop went into effect. Thanks to word-of-mouth buzz and press attention, within two days subscriptions jumped from about 20,000 to 100,000. MoviePass had transformed from a scrappy startup trying to keep the lights on to a disrupter in the making.
But Spikes saw a looming disaster. The company was overwhelmed by its overnight success and couldn’t keep up with demand. A quarter-million new subscribers were signing up every month, and MoviePass customer-service lines were flooded with complaints from people who had been waiting weeks for their cards. MoviePass had lowballed the number of cards it would need after the price drop. It got to a point where the vendor making the MoviePass cards didn’t have enough plastic and had to call on its competitors to fulfill all the card orders. “We all knew we were selling something we couldn’t deliver on,” one former staffer said.
The same way you evaluate any other business, which is trying to think about the present value of future cash flows. This is an area where the world has changed pretty significantly over the past couple of decades because, 30 years ago, most investments were done via the balance sheet. They were investments in buildings, in factories, in railroads, in locomotives and all those came out of the balance sheet. Today, a lot of investment happens out of the income statement. If you are a software company, and you are acquiring new customers, who might have a nine to 10-year lifespan with the business, that comes out of sales and marketing, and so that depresses your current margins.
But it seems insensible to me to argue that I should not invest in a customer who could be with me for 10 years and who will pay me 3% more every year as I raise prices. Why is that not just as valuable an investment as a machine that will wear out in 10 years? One is an appreciating asset and the other is a depreciating asset. The former — the customer — comes by way of investing through the income statement and depresses current margins. As for buying the machine, it is just a capital expenditure. If you have a business that is re-investing heavily today, a software company or an Amazon for example, you have to think about the incremental unit economics. How much does it cost to acquire each customer and how much value do they deliver over some span of time, and then try to think about what does this business look like at steady state, say in a five or 10-year timeframe. You know what margins it will have once the investment slows down and then you discount those cash flows back to the present.
So far, Uber and Lyft have competed very heavily on price. That was evident in both of their IPO filings, they have been trying to undercut each other on price, which is not the sign of a healthy competitive dynamic that’s going to result in great return for shareholders. Maybe that will change, I don’t know. But, when I see two big companies trying to basically undercut each other on price and, it’s not really clear who is going to win, I’d rather just stay on the sidelines and watch. One of the most important things for an investor to do is to maximise return on time. By analysing Uber and Lyft, we probably aren’t going to get a lot of advantage, because everybody and their mother is trying to have an opinion on these things, and it’s just not clear how the competitive dynamics will pan out long term. So we’ve spent literally zero time on them!
A lot of it comes down to the unit economics of the business. Boeing and Airbus need to absorb a lot of fixed costs. Building an aircraft factory, investing and designing a new aircraft, requires a lot of very high fixed costs, and so they need to absorb that. And so, each incremental plane sold is very important to both companies. So they need to take market share from each other. Whereas for Visa and Mastercard, their fixed cost for the payment networks, those costs were sunk decades ago. Their network is there. It exists. So there’s no incentive to compete on price, because they don’t have the same economics of cost absorption.
When to sell and when a moat is weakening are really two different questions. But I would say, the biggest signal that a moat is weakening is the lack of pricing power. If a business historically had been able to raise prices and is no longer able to raise prices, that generally indicates that its competitive advantage is weakening or disappearing.
Take a look at Joe Rogan, who currently has the most popular talk show podcast with over 200 million downloads per month. This number comes from Joe himself¹, but let’s assume he was exaggerating and it’s only 100 million downloads per month.
Assuming he sells ads at a low $18 CPM (cost per thousand listeners) and sells out his ad spots, he’s making approximately $64mm in annual revenue. If he’s on the higher end, at $50 CPM, he could be making as much as $240mm per year². The only factor that would change this is how many free ads Joe gives to companies that he has a personal equity stake in (like Onnit, the supplement brand he co-owns).
That means that Joe makes somewhere between $64-$240 million per year in revenue from his podcast advertising alone—and that’s handicapping his audience by half what he claims to have. That number also doesn’t include any additional revenue generated from his wildly popular YouTube channel, which has over 6 million subscribers.
Based on existing advertising revenues alone, Joe Rogan could easily be worth over a billion dollars, even if he doesn’t realize it. If estimates are correct, he owns a business that produces somewhere in the neighborhood of $60-$235 million/year in profit and is likely growing at 30–50% annually (assuming his audience is growing alongside the podcast ecosystem)³. If it were publicly traded, his podcasting business could easily fetch a valuation in the billions.
When people talk about harmful stress — the kind that can affect health — they usually point to big, life-changing events, such as the death of a loved one. A growing body of research suggests that minor, everyday stress — caused by flight delays, traffic jams, cellphones that run out of battery during an important call, etc. — can harm health, too, and even shorten life spans.
My point in all of this is that Buy the Dip, even with perfect information, typically underperforms DCA. So if you attempt to build up cash and buy at the next bottom, you will likely be worse off than if you had bought every month. Why? Because while you wait for the next dip, the market is likely to keep rising and leave you behind.
What makes the Buy the Dip strategy even more problematic is that we have always assumed that you would know when you were at every bottom (you won’t). I ran a variation of Buy the Dip where the strategy misses the bottom by 2 months, and guess what? Missing the bottom by just 2 months leads to underperforming DCA 97% of the time! So, even if you are somewhat decent at calling bottoms, you would still lose in the long run.
I wrote this post because sometimes I hear about friends who save up cash to “buy the dip” when they would be far better off if they just kept buying. My friends do not realize that their beloved dip may never come. And while they wait, they can miss out on months (or more) of continued compound growth. Because if God can’t beat dollar cost averaging, what chance do you have?
If you missed just the 25 strongest days in the stock market since 1990, you might as well have been in five year treasury notes. This remarkable data point is almost always followed by “time in the market beats timing the market.”
If by some miracle you managed to miss the 25 best days, you likely would have missed at least some of the worst days as well. You’ll notice a few things. The best days often follow the worst days, and the worst days occur in periods of above average volatility (red dotted line). These volatility spikes happen in lousy markets, so, if you can avoid the very best days, you will probably also avoid the very worst days, thereby avoiding lousy markets.
The chart below shows what happens if you were able to successfully avoid the 25 best and 25 worst days. This would have put you well ahead of the index. Of course this assumes perfect end of day execution, no transaction costs, and most importantly, no taxes.
When earnings compound but changes in valuation multiples don’t, the importance of the latter to your lifetime returns diminishes over time. Which is great, because changes in valuation multiples are the most unpredictable part of investing. Assuming earnings compound over time – an assumption, but a reasonable one – here’s what happens when valuation multiples go up or down by, say, 20% in a given year.
Valuation changes have a majority impact on your overall returns early on because company earnings are likely the same or marginally higher than when you made the investment. But as earnings compound over time, changes in any given year’s valuation multiples have less impact on the returns earned since you began investing. So as time goes on you have less reliance on unpredictable things (voting) and more on things you’re confident in (weighing).
Anchor provides a way to capture new podcasters, leading them either to Spotify advertising or, in the case of rising stars, to Spotify exclusives. Critically, because Spotify has access to all of the data, they can likely bring those suppliers on board at a far lower rate than they have to pay for established creators like Gimlet Media.
Spotify Advertising, as I just suggested, makes a strong play to be the dominant provider for the entire podcasting industry. Spotify Advertising is already operating at a far larger scale than Midroll, the incumbent player, and Spotify has access to the data of the second largest podcast player in the market.
Gimlet Media becomes an umbrella brand for a growing stable of Spotify exclusive podcasts. Critically, as I noted above, the majority of these podcasts come to Spotify not because Spotify pays them millions of dollars but simply because Spotify is better at monetizing than anyone else.
Spotify doubles down on podcasts by acquiring Gimlet and Anchor
Spotify has acquired Gimlet Media and Anchor as it doubles down on its audio-first strategy. Gimlet is the podcast production house behind popular shows such as Reply All and The Cut. With Gimlet, Spotify has acquired a team with a proven record in original content production which should enhance its competitive position relative to Apple. Anchor provides easy-to-use software for podcast creation, ad insertion, and distribution, with more than 40% share of new podcasts produced. Anchor’s wealth of data should help Spotify identify and target original content, attracting more users to its ecosystem.
Podcasts should enable Spotify to differentiate its service and reduce its dependence on the music labels. Ever since Spotify’s initial public offering, the bear case has been that it never will deliver attractive returns because the labels will demand an ever-increasing share of its revenues. If its foray into original podcasts is successful, Spotify will convert some of its variable costs into fixed costs, improving its profit margins.
The ad-supported podcast business also is attractive. As shown above, podcast listener hours are roughly 12% those of radio but only 3% of the ad dollars. That gap should close with time. More important, as is the case with TV, traditional radio is in secular decline. A generation from now, podcasts could be the default format for spoken audio. If able to secure a leadership position, Spotify could enjoy a recurring revenue model with much higher margins in the years to come.
“In the very beginning, we had different competitors but they were small,” said Wang in a 2015 interview with Chinese-language news site of Guangzhou-based NetEase. “We made a lot of the right decisions to stand out in the industry … I think it is DJI’s success that made the drone industry attractive to investors and users.”
Chris Anderson, the chief executive of DJI’s major rival 3D Robotics, was quoted by US media as saying that the Chinese company has been “executing flawlessly” and “we just got beaten fair and square”.
“I do not see any strong competitor for DJI so far,” said Cao Zhongxiong, executive director of new technology studies at Shenzhen-based think tank China Development Institute. “The company can dominate the drone industry for some years to come.”
“We found success on the consumer side and are now leveraging the things we do very well into other industries. We are also expanding to serve different companies, operations and industries globally,” said Bill Chen, DJI’s enterprise partnership manager. He said the use of drones in agriculture will be a particular focus for the company.
DJI has rolled out a development kit so software developers can write applications for specific tasks, signalling the company’s shift from a hardware manufacturer to platform operator. “We aim to build a versatile platform that can be addressed by third-party developers as well,” Chen said.
The global video surveillance equipment market is expected to grow 10.2 per cent to US$18.5 billion in 2018 thanks to increasing demand for security cameras, according to a report by London-based market research firm IHS Markit in July. China’s professional video surveillance equipment market, which accounts for 44 per cent of all global revenue, grew by 14.7 per cent in 2017, outpacing the rest of the world, which grew by only 5.5 per cent, the report showed.
Around 42 per cent of the company is controlled by state-owned enterprises, with China Electronics Technology HIK Group owning 39.6 per cent of the company as the biggest shareholder. Hikvision had a leading share of 21.4 per cent for the global closed-circuit television and video surveillance equipment market in 2017, according to IHS Markit.
IHS Markit estimated that China had 176 million surveillance cameras in public and private areas in 2017, compared to only 50 million cameras in the US. The researcher expects China to install about 450 million new cameras by 2020. The researcher expects about 450 million new cameras to be shipped to the Chinese market by the end of 2020.
You can be great investor and still spend yourself broke. Ego is easier to develop and maintain than alpha, so good returns without the psychology necessary to hold onto those returns where money can continue compounding can be defeating. The math of compounding ensures that neither those who earn big returns but spend them quickly, or power savers who settle for low returns, will build meaningful wealth. There are many good investors. There are many good savers. It’s the intersection of both that compounding rules wild and big leaps are made.
The same mindset that allows visionaries to see things normal people can’t blinds them to realities normal people understand. If you’re staggeringly good at one thing, your mind probably has little bandwidth for other vital things necessary to make your skill work. Look around. There are a lot of people with crazy good ideas. But many people with crazy good ideas are crazy, and their idea is an outgrowth of a mind that has little patience for things like employee culture and appeasing investors, so their idea never stands a chance. A big leap happens when a visionary mixes with a sober operator who can tame the worst impulses of an otherwise great idea.
Intangible assets now make up 84 percent of the market value of the S&P 500. That’s up from just 17 percent in 1975. We investors clearly value things like investment in brands, new business processes, skills development for employees, R&D, etc., as drivers of future value. In other words, we believe these investments will create revenues in the future. But accounting can’t figure out how to value those non-tangible assets, so it treats those investments as expenses. That just doesn’t make sense.
The company is one of the most amazing inventions of humans, this abstract construct that’s incredibly powerful. Even so, for me, it’s about the products. It’s about working together with really fun, smart, creative people and making wonderful things. It’s not about the money. What a company is, then, is a group of people who can make more than just the next big thing. It’s a talent, it’s a capability, it’s a culture, it’s a point of view, and it’s a way of working together to make the next thing, and the next one, and the next one.
That fossil fuels are finite is a red herring. The Atlantic Ocean is finite, but that does not mean that you risk bumping into France if you row out of a harbor in Maine. The buffalo of the American West were infinite, in the sense that they could breed, yet they came close to extinction. It is an ironic truth that no nonrenewable resource has ever run dry, while renewable resources—whales, cod, forests, passenger pigeons—have frequently done so.
My biggest lesson that I’ve learned… I have the same flaw that every human being has and that is: As you’re growing up and getting older, you believe that everybody’s like you. You just extrapolate your personality traits and proclivities on other people. Then you start to realize increasingly, that that’s not true. And I believed, therefore, that everybody was intellectually objective and honest and wanted to figure things out for themselves. And I didn’t understand, for probably as long as 20 years, why I couldn’t convince people of almost mathematically analytical arguments regarding markets. And it was finally after years of this that I realized that people actually want to be told what to think.
It took me a long time to understand that. Not me, see, I don’t want to be told what to think. And so I figured nobody wants to be told what to think. But indeed, I think almost everybody wants to be told what to think. That creates a tremendous advantage in managing money. Because in that window of time between a fact and people being told what the fact means, you have a window if you’re capable of figuring out what it means – and don’t need to be told what it means – where you can actually act before other people and I found I’ve made a lot of money that way.
I remember when Ben Bernanke announced the Fed funds rate was going to stay at 0% for three years, and the markets didn’t move. And I had my traders look for this asset class in the bond market that would be the primary beneficiary of rate staying at zero for three years. And I said, “How much of the prices up?” And they said, “They’re not up at all.”
Dan Scholnick, general partner at Trinity Ventures, whose investments have included New Relic and Docker, was not terribly impressed with the deal, believing it smacked of desperation on IBM’s part. “IBM is a declining business that somehow needs to become relevant in the cloud era. Red Hat is not the answer. Red Hat’s business centers around an operating system, which is a layer of the technology stack that has been completely commoditized by cloud. (If you use AWS, you can get Amazon’s OS for free, so why would you pay Red Hat?) Red Hat has NO story for cloud,” he claimed in a statement.
Forrester analyst Dave Bartoletti sees the cloud native piece as being key here. “The combined company has a leading Kubernetes and container-based cloud-native development platform, and a much broader open source middleware and developer tools portfolio than either company separately. While any acquisition of this size will take time to play out, the combined company will be sure to reshape the open source and cloud platforms market for years to come,” he said.
The best thing going for this strategy is its pragmatism: IBM gave up its potential to compete in the public cloud a decade ago, faked it for the last five years, and now is finally admitting its best option is to build on top of everyone else’s clouds. That, though, gets at the strategy’s weakness: it seems more attuned to IBM’s needs than potential customers. After all, if an enterprise is concerned about lock-in, is IBM really a better option? And if the answer is that “Red Hat is open”, at what point do increasingly sophisticated businesses build it themselves?
The problem for IBM is that they are not building solutions for clueless IT departments bewildered by a dizzying array of open technologies: instead they are building on top of three cloud providers, one of which (Microsoft) is specializing in precisely the sort of hybrid solutions that IBM is targeting. The difference is that because Microsoft has actually spent the money on infrastructure their ability to extract money from the value chain is correspondingly higher; IBM has to pay rent:
Even if content is created by a publisher and merely distributed through the tech platform, the tech company still captures its data; Netflix, for example, doesn’t share ratings data with TV producers, and Amazon doesn’t share Kindle readership data with the publishing industry. Meanwhile, Facebook actually shared false data with brands about their video’s viewership for years.
- Anheuser-Busch InBev acquired a stake in RateBeer, a leading beer review platform, and October, a beer culture website.
- Popular makeup startup Glossier initially launched as a content site; it then used insights gathered from users to develop its own line of cosmetics. Now, it aims to launch a new social commerce platform to encourage user reviews and feedback.
- L’Oreal invested in Beautycon Media, which creates digital beauty content and hosts festivals for influencers
- Mattress startup Casper even launched its own magazine; the current issue includes features like “A skeptic’s guide to crystals” and an adult coloring book.
“The dynamics we’ve entered is, in many ways, creating a dangerous, high stakes Ponzi scheme. Highly marked up valuations, which should be a cost for VCs, have in fact become their key revenue driver. It lets them raise new funds and keep drawing fees.”
“VCs bid up and mark up each other’s portfolio company valuations today, justifying high prices by pointing to today’s user growth and tomorrow’s network effects. Those companies then go spend that money on even more user growth, often in zero-sum competition with one another. Today’s limited partners are fine with the exercise in the short run, as it gives them the markups and projected returns that they need to keep their own bosses happy.”
“Ultimately, the bill gets handed to current and future LPs (many years down the road), and startup employees (who lack the means to do anything about the problem other than leave for a new company, and acquire a ‘portfolio’ of options.)”
AB InBev argued that by taking its leverage down to 2x net debt/EBITDA, it will reduce its cost of capital and “maximize total enterprise value.” All else equal, a lower cost of debt would in theory increase enterprise value, yet AB InBev already has solidly investment-grade credit ratings (e.g., A- from S&P). A ratings upgrade within the investment-grade space would likely only have a marginal impact on lowering cost of debt. Deleveraging could even increase its cost of capital, as more expensive equity takes a greater share of the capital structure.
Ultimately, a company’s dividend should be affordable, reflect the growth in shareholder value creation, and help management more prudently select high-return projects rather than pursue wasteful “empire building” deals. Dividends can be a problem, however, when they become too generous and handcuff management’s ability to invest in high-return projects and defend or widen the firm’s economic moat. When this happens, a dividend “rebasing” or “cut” would benefit long-term shareholders.
Uber received proposals from investment banks that pegged the ride-hailing firm’s IPO valuation at $120B. So, that posits Uber’s value is greater than the value of the US airline industry or the US auto industry (excluding Tesla). I love Uber and think the firm is genius. But that valuation is insane. Uber’s model doesn’t have the moats of an auto firm or even Airbnb, which must create global demand and supply (a local competitor to Airbnb doesn’t work, as visitors from other countries wouldn’t know about it). In contrast, local on-demand taxi services abound, even if without an app. The 120K readers of this newsletter could each put in $250, and boom — we have the number-three ride-hailing firm in Miami. Who’s with me?
In today’s economy, innovation means elegant theft: robbery of your data, privacy, health insurance, or minimum-wage protection. Uber has 16K employees and 3M driver partners. “Driver partner” means some great things. It means you don’t have to show up to an office. And it means you can work whenever you want — this is key. When I speak to Uber drivers, I always ask, “Do you like working for Uber?” The overwhelming majority say yes and reference the flexibility. I’ve been especially struck by how many need the flexibility, as they’re taking care of someone who’s sick. So many people taking care of others. So many people loving other people. And it comes at a huge cost. Many of them used to have jobs with benefits. Many had to move to a strange place to take care of their sister, mother, nephew.
In the near term, around $6.6 trillion of the expected GDP growth will come from productivity gains, such as the continued automation of routine tasks. Over time, increased consumer demand for AI-enhanced offerings will overtake productivity gains and result in an additional $9.1 trillion of GDP growth by 2030.
China is expected to see the greatest economic gains from AI, a $7 trillion or 26% boost in GDP growth. One reason is the high proportion of China’s GDP that is based on manufacturing, where AI is expected to have a particularly big impact between now and 2030. Even more important over the longer term is China’s higher rate of AI investments compared to North America and Europe.
China is expected to see the greatest economic gains from AI, a $7 trillion or 26% boost in GDP growth. One reason is the high proportion of China’s GDP that is based on manufacturing, where AI is expected to have a particularly big impact between now and 2030. Even more important over the longer term is China’s higher rate of AI investments compared to North America and Europe.
In North America, the economic gains from AI are expected to reach $3.7 trillion or 14.5% of GDP growth by 2030. North America will see the fastest growth in the near term, given its current lead in AI technologies, applications, and market readiness. But China will likely begin to catch up by the middle 2020s given its accelerating AI investments.
Some of the world’s most destructive earthquakes — China in 2008, Haiti in 2010 and Japan in 2011, among them — occurred in areas that seismic hazard maps had deemed relatively safe. The last large earthquake to strike Los Angeles, Northridge in 1994, occurred on a fault that did not appear on seismic maps.
Think about how profound this is. One of the shortest lived mammals and one of the longest lived both have the same expected number of heart beats at birth. The term for differently sized systems displaying similar behavior is known as scale invariance and can be applied to non-biological systems as well.
As the number of employees increases, company revenue increases slightly exponentially/superlinearly. To be exact, every time the number of employees doubles (a 100% increase), revenue goes up by 112% (more than double). This corresponds to the slope of the line above at 1.12 (on a log-log scale). Note that this does not imply causality between these two metrics, but that, in a successful business, they tend to move together in some organic fashion.
For example, Netflix prides itself on being “lean”, Amazon hires thousands of warehouse workers, and Apple has a large retail presence, yet they all seem to adhere to some natural law related to company size and revenue as seen by their similar slopes. I found the same thing when comparing the number of employees to total assets as well, except the scaling exponent was slightly higher at 1.25:
Even if we cured cancer, we only add 3 years to life expectancy. Of course this is still a noble goal because it would prevent so much pain for so many people, but it doesn’t change the fact that life leads to death. It doesn’t change what will always be true. So take your 2.2 billion heart beats and make them count. They are the only ones you will ever get.
Over its two decades in business, TripAdvisor has turned an initial investment of $3m into a$7bn business by figuring out how to provide a service that no other tech company has quite mastered: constantly updated information about every imaginable element of travel, courtesy of an ever-growing army of contributors who provide their services for free. Browsing through TripAdvisor’s 660m reviews is a study in extremes.
Researchers studying Yelp, one of TripAdvisor’s main competitors, found that a one-star increase meant a 5-9% increase in revenue. Before TripAdvisor, the customer was only nominally king. After, he became a veritable tyrant, with the power to make or break lives.
As the so-called “reputation economy” has grown, so too has a shadow industry of fake reviews, which can be bought, sold and traded online. For TripAdvisor, this trend amounts to an existential threat. Its business depends on having real consumers post real reviews. Without that, says Dina Mayzlin, a professor of marketing at the University of Southern California, “the whole thing falls apart”. And there have been moments, over the past several years, when it looked like things were falling apart. One of the most dangerous things about the rise of fake reviews is that they have also endangered genuine ones – as companies like TripAdvisor raced to eliminate fraudulent posts from their sites, they ended up taking down some truthful ones, too. And given that user reviews can go beyond complaints about bad service and peeling wallpaper, to much more serious claims about fraud, theft and sexual assault, their removal becomes a grave problem.
By 2004, TripAdvisor had 5million unique monthly visitors. That year, Kaufer sold TripAdvisor to InterActiveCorp (IAC), the parent company of the online travel company Expedia, for $210m in cash, but stayed on as CEO. For the next few years, TripAdvisor continued to grow, hiring more than 400 new employees around the world, from New Jersey to New Delhi. By 2008, it had 26 million monthly unique visitors and a yearly profit of $129m; by 2010, it was the largest travel site in the world. To cement its dominance, TripAdvisor began buying up smaller companies that focused on particular elements of travel. Today, it owns 28 separate companies that together encompass every imaginable element of the travel experience – not just where to stay and what to do, but also what to bring, how to get there, when to go, and whom you might meet along the way. Faced with such competition, traditional guidebook companies have struggled to keep up. In 2016, Fodor’s, one of the most established American travel guide companies, was bought by a company called Internet Brands.
By 2011, TripAdvisor was drawing 50 million monthly visitors, and its parent company, IAC, decided that the time had come to spin it out as a separate, publicly traded entity. Its IPO was valued at $4bn, but in December, on the first day of trading, shares fell. TripAdvisor was in new and uncertain territory, and no one knew how the company would fare on its own.
Even so, TripAdvisor is still worth only half of what it was in June 2014, and its shares dropped again in August after it missed its revenue forecast. Booking.com and Expedia, which together accounted for 46% of TripAdvisor’s annual revenue last year, largely due to marketing deals, cut back on their advertising spending. Where Maffei saw positive results, the travel industry news site Skift saw warning signs. TripAdvisor had grown by only 2% in the second quarter of 2018, it pointed out, using the words “anaemic” and “sluggish” to describe its situation. Over time, TripAdvisor has grown so large that it has become difficult to explain what it is, exactly: it’s not quite a social network, though it encourages users to “like” and comment on each other’s posts; nor is it a news site, though its business is staked on aggregating legitimate sources to provide an up-to-date portrait of the world; nor is it simply an online marketplace like its competitors Expedia.com and Booking.com. When TripAdvisor first started, consumer reviews were a new and exciting thing; now they are everywhere.
“The modern media company must develop extensive direct-to-consumer relationships,” AT&T chairman-CEO Randall Stephenson told investors last month. “We think pure wholesale business models for media companies will be really tough to sustain over time.”
“The single worst thing Disney could do is launch a DTC product that consumers find underwhelming,” analyst Todd Juenger of Bernstein Research wrote this month. “We struggle to see how Disney can simultaneously make this [sustained] investment while also de-leveraging, even in a stable macro environment. We fear they will either underinvest in the DTC product, or fail to delever.”
“First, and probably most importantly, all of our business lines are significantly recession proof. Relatively speaking, low price items, whether they are domain names or mobile phone service or home Internet, they are core needs, things that people cannot do without. They are not luxuries. They are, in the context of today’s world, necessities. And so we believe our business to be relatively recession-proof.”
“When looking at the Ting Internet pipeline, there are a few things that I want to reiterate up front. First, we are not cash constrained. We are not opportunity constrained. We are resource constrained. There is plenty of opportunity out there.” – TCX CEO August 21, 2018
The role of supplier to a bleeding-edge innovator has its perks. Fiat Chrysler is currently in talks with Waymo to license the software it would need to sell full self-driving cars to retail customers. Waymo CEO John Krafcik has said he envisions sharing profits from the robotaxi business with automaker partners in the future. “We’re not disrupting this industry—we are enabling this industry,” Krafcik told Bloomberg in an interview last month.
There are also partnerships with BMW AG and auto supplier Aptiv Plc to bring limited autonomous features, such as automated steering and lane changes, to Fiat Chrysler’s Jeep, Ram, Maserati and Alfa Romeo brands starting in 2019. In that way, without paying billions for research, Fiat Chrysler may end up with access to much of the same technology as big-spending leaders in the field.
I will say something which in counterintuitive here; in India, distribution is king over data. I think the distribution of Paytm, the reach of Paytm is the reason of the network effect that creates its value, not necessarily the outcome of data which we have not started using yet. I could say that different verticals of our business will use it differently versus the plan that we have in terms of our distribution. Our plan is to distribute it across every nook and corner and get a larger number of consumers. That is the first success that we will have and when we build on top of it as the next set of things.
In terms of viewership, the big esports events post even more impressive numbers. The 2017 League of Legends world championship, held in Beijing, drew a peak of over 106 million viewers, over 98 percent of whom watched from within China, according to industry analyst Esports Charts. That’s roughly on par with the audience for the 2018 Super Bowl.
Newzoo estimates that by 2021 esports will be a $1.7 billion industry worldwide. A 2018 Washington Post-University of Massachusetts Lowell poll found, for instance, that 58 percent of 14- to 21-year-olds said they watched live or recorded video of people playing competitive video games, with a similar percentage reporting that they played such games themselves. Among adults overall, just 16 percent said they watched competitive video gaming.
“Today the most valuable assets are more likely to be stored in the cloud than in a warehouse,” says Inga Beale, chief executive of Lloyd’s of London.
Intangible assets can be hard to define, let alone translate into dollars (under international accounting standards they are defined as “identifiable non-monetary asset[s] without physical substance”). Yet their growth has been undeniable. In 2015, estimates Ocean Tomo, a merchant bank, they accounted for 84% of the value of S&P 500 firms, up from just 17% in 1975. This does not merely reflect the rise of technology giants built on algorithms; manufacturers have evolved too, selling services alongside jet engines and power drills, and crunching data collected by smart sensors.
As the importance of intangibles has grown, so has companies’ need to protect themselves against “intangible risks” of two types: damage to intangible assets (eg, reputational harm caused by a tweet or computer hack); or posed by them (say, physical damage or theft resulting from a cyberattack). However, insurance against such risks has lagged behind their rise. “The shift is tremendous and the exposure huge,” says Christian Reber of the Boston Consulting Group, “but the insurance industry is only at the early stage of finding solutions to close the gap.”
Since 1970, the share of the American stock market owned by large investment firms has grown from 7% to 70%. Collectively, the three biggest private funds — BlackRock, Vanguard, and State Street — own more than any other single shareholder in 40% of the public companies in the U.S. That means they are often the most influential shareholders of companies that are supposed to be in competition with each other. Such “horizontal shareholding,” as it’s called, may erode competition, boost consumer prices, and possibly violate long-standing antitrust laws.
The silver lining in prior yield curve inversions is a recession did not occur immediately. On average it was 19 months before the onset of a recession. Additionally, the average return for the S&P 500 Index from the date of the inversion to the recession was 12.7%. For investors then, one need not panic at the first instance of an inversion; however, thought should be given to one’s portfolio allocations and make any necessary adjustments during the ensuing months. In short, respect should be given to the potential economic impact of a yield curve inversion.
And the perennial threat that China would sell its Treasuries. That could happen as a byproduct of a decision by China to push its currency down—if China signals that it wants a weaker currency, the market would sell yuan for dollars, and controlling the pace of depreciation would require that China sell reserves. Or could happen even if China maintained its current basket peg and shifted its portfolio around—selling Treasury notes for bills, or selling Treasuries and buying (gulp) Bunds (if it can find them—it might end up buying French bonds instead) or JGBs.
If Treasury sales came in the context of a decision by China that it wanted a weaker currency to offset the economic impact of Trump’s tariffs (or simply a decision by the PBOC that it needed to loosen monetary policy in response to a slowing Chinese economy, and thus to no longer follow the Fed), the disinflationary impulse from a weaker yuan (and a broader fall in most Asian currencies and a rise in the dollar) would likely be more powerful than the mechanical impact of Treasury sales. That is the lesson of 2015-16.
Treasuries sales in a sense are easy to counter, as the Fed is very comfortable buying and selling Treasuries for its own account. I have often said that the U.S. ultimately holds the high cards here: the Fed is the one actor in the world that can buy more than China can ever sell.
Staying on the topic of streaming video, this is a relevant example of how shared-value transactions gives Amazon a potential structural advantage over the leader in the space: Netflix. Success in streaming video requires great video content, and Netflix will spend $8 billion this year buying video rights. The way Netflix funds this hefty content bill is that they have 120 million customers who pay them $10 each month directly, and then they take half of that fee collected from every subscriber and spend it on content. So every subscriber pays for content equally (about $5 per user per month) as Netflix earns the exact same amount from their best users as their worst users.
Amazon too will spend a significant sum buying video content (about $5 billion this year). But their content bill is paid entirely differently. Instead of only depending on a percentage of Prime membership fees (which are the same for every user) to fund their content budget, Amazon can pay for content using revenue from purchases of books, diapers, toilet paper, laundry detergent, and more (and this spend is most definitely not the same for every user). As Bezos has said: “When we win a Golden Globe, it helps us sell more shoes”. Amazon’s best users are able to purchase significantly more goods than their average user, and these funds can be indirectly applied to fund video content that everyone shares value from.
By digging deeper into the operating margins, we find that the difference between the two companies seems to come down to the approaches of their growth strategies. Dropbox has grown primarily through a highly efficient marketing function and self-serve model, while Box has grown through a traditional, and more expensive, enterprise sales model.
This story hides some major issues with Dropbox. Their strategy for years has been to go after the consumer cloud storage market, which never made sense, as that market is highly competitive and has limited revenue potential. Box decided long ago to pivot to the enterprise, while Dropbox went through numerous failed acquisitions and internal initiatives, attempting to build products in everything from email to payments. They built a strong consumer brand in the process but ultimately decided to double down on enterprise. We think it’s too late.
The cloud storage and file hosting industry, including all the related services, doesn’t seem to be protected by a particularly wide moat. All of the major technology names are active in this field as well, including Amazon, Google, Microsoft, and Apple. All of these companies have the added advantage of pre-existing customer relationships. The main advantage Dropbox would need is the ability to provide differentiated services to enterprises. However, we haven’t seen evidence of Dropbox’s ability to effectively build differentiated enterprise products. As they are forced to expand their market, we believe they will face stiff competition that will make it more difficult to grow. On the other hand, the 500 million users may be the key to unlocking growth within enterprises that enterprise sales teams couldn’t effectively crack.
The stats for Fortnite, the top free-to-play console game, are incredible.— Leo Polovets (@lpolovets) July 2, 2018
Annual revenue per user:
Annual revenue per user for Fortnite: $96.
Almost 2x more than Google+FB+Twitter+Snapchat combined. https://t.co/XgBrsxkG8k
Airbnb has reportedly spent only $300 million on marketing since its inception in 2008. “We don’t acquire customers by buying them. We acquire customers by providing a superior experience and having offerings around the world,” a spokesperson emailed.
Booking spent $4.5 billion on marketing last year alone. Yet Fogel admits that it still lags in consumer awareness. The brand is much better known in Europe, where it was founded. “The product is just as good here as anywhere else … and therefore we should have much more [awareness],” he says, noting that Booking.com only came to the US in 2013. Booking Holdings’ other brands, like Priceline and Kayak, have loyal bases of users, Fogel says. But Booking.com makes up the vast majority of the company’s revenue, and the name change from Priceline to Booking Holdings shows what executives consider their crown jewel.
Airbnb is fighting back with two high-end tiers of hotel-like offerings and luxury accommodations, Airbnb Plus and Beyond by Airbnb. The company emphasizes that 3.5 million of its listings are exclusive and that business travel now makes up 15 percent of its bookings. Beyond that, Airbnb has been selling tourist activities to its customers through its Experiences product for two years.
WeDoctor’s data comes from several sources, but one of the most important is the hundreds of hospitals in its network whose doctors plug information into a central database — with consent from patients who may want to switch care-givers. They could also upload their own records. The company then profiles users, classifying them in buckets based on age, gender, region or symptoms. That’s a potent advertising aid to drugmakers and insurers, Chen says. That leeway to commercialize patient information comes with caveats: WeDoctor stresses data is anonymous and it doesn’t share it with third parties.
That’s just one piece of the money-making puzzle. WeDoctor also takes a cut on consultation fees via its app or smart speaker. The 4,000 yuan box has a screen in the front and comes with a year’s access to doctors online.
Those clinics complement “online hospitals.” WeDoctor’s won licenses to operate 10 such platforms that offer real-time chats with doctors. This also lets the best clinicians, usually working out of big hospitals that keep fees artificially low, to earn more on the side. Top doctors can demand 3,000 yuan per session, WeDoctor says.
WeChat-driven information consumption reached RMB 209. 7 billion
WeChat accounted for 34% of the total data traffic of users
WeChat drove RMB 333.9 billion traditional consumption, covering travel, food, shopping, tourism, etc.
WeChat contributed the employment of 20.3 million persons in 2017, more than twice the 2014 figure
The number of stores accepting WeChat Payment in Japan was multiplied by 35 in 2017
According to business managers, many of those three million annual science and technology graduates lack crucial analytical and communication skills, and are barely employable. Similarly, a large proportion of those 430,000 research papers have little or no scientific value. And many of China’s 1.4 million yearly patent applications are destined to prove worthless. In fact, fewer than 20 per cent of China’s applications even claim to be for new inventions; the vast majority are for lower-tier design or utility model patents, which typically cover minor incremental changes to existing products.
Inventive economies generate handsome international income streams by licensing their technologies to foreign companies, which then pay them intellectual property royalties. In 2016, China earned just US$1 billion from the rest of the world in intellectual property payments. In contrast it paid out US$24 billion (and according to many critics, it should have paid a great deal more). Now compare those numbers with the equivalent figures for the US, which last year earned US$128 billion from licensing its intellectual property to other countries, while paying out US$48 billion. Meanwhile, Japan earned US$35 billion, and paid out US$18 billion.
One of the most amusing episodes in the book comes when Kahneman visits a Wall Street investment firm. After analysing their reports, he calculated that the traders, who were highly prized for their ability to “read” the markets, performed no better than they would have done if they made their decisions at random. The bonuses that they received were, therefore, rewards for luck, even though they found ways of interpreting it as skill. “They were really quite angry when I told them that,” he laughs. “But the evidence is unequivocal — there is a great deal more luck than skill involved in the achievements of people getting very rich.”
“When you are cramming for a test, you are holding that information in your head for a limited amount of time,” Mr. Carey says. “But you haven’t signaled to the brain in a strong way that’s it’s really valuable.”
One way to signal to the brain that information is important is to talk about it. Ask a young student to play “teacher” based on the information they have studied. Self-testing and writing down information on flashcards also reinforces learning.
“Sleep is the finisher on learning,” Mr. Carey says. “The brain is ready to process and categorize and solidify what you’ve been studying. Once you get tired, your brain is saying it’s had enough.”
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.
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.
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.”
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.
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 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.
“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 .
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.
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.
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.
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).
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.
“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.*
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.
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.
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.
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.”
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.
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.
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.
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.
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 content costs are high in part because it now buys out all the rights (e.g. home video, syndication, EST) for its Originals on a global basis, while traditional networks (e.g. FX or ABC) will typically buy only select content rights and on a single market basis. Furthermore, buying out all rights means that the talent involved in a hit series (e.g. cast, writers, producers) don’t have access to any of the economic upside from participating in a hit series. As such, Netflix must also pay extra (and upfront) to compensate the talent responsible for their Originals for this lost income opportunity (albeit on a risk-adjusted basis). As a result, Netflix’s costs for a given volume of original content is substantially higher than that of linear and/or domestic networks with the same output. That said, this same dynamic means that while most of its traditional networks hedge their content investments, Netflix quadruples down.
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.
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.
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.
There is a very common misconception that we sell data to advertisers, and we do not sell data to advertisers. What we allow is for advertisers to tell us who they want to reach and then we do the placement. So, if an advertiser comes to us and says, ‘Alright, I’m a ski shop and I want to sell skis to women,’ then we might have some sense because people shared skiing related content or said they were interested in that. They shared whether they’re a woman. And then we can show the ads to the right people without that data ever changing hands and going to the advertiser. That’s a very fundamental part of how our model works and something that is often misunderstood.
So to sum up: in 2015, it became clear to Facebook and certainly to senior leadership that the data of 87 million people had been sold against the company’s terms. Whether or not to inform those users seems like a fundamental question, yet Zuckerberg claimed to have no recollection of any discussion thereof. That hardly seems possible — especially since he later said that they had in fact had that discussion, and that the decision was made on bad information. But he doesn’t remember when this discussion, which he does or doesn’t remember, did or didn’t take place!
Here’s the problem: No matter how hard Google and Facebook try to help publishers, they will do more to hurt them, because that’s the way they’re supposed to work. They’re built to eviscerate publishers.
Publishers create and aggregate information and present it to users in return for their attention, which they sell to advertisers. And that’s exactly what Google and Facebook do, too: Except they do a much better job of that. That’s why the two companies own the majority of digital ad dollars, and an even bigger chunk of digital advertising growth. (Yes, those numbers can change — but if anyone displaces Google or Facebook, it will be another tech company.)
Mr. Bezos gave employees a mandate last year to push financial services as a key initiative, according to a person briefed on the matter. The company also restructured internally to add its digital wallet, Amazon Pay, to its team that focuses on Alexa as part of plans to make voice commands the next wave of commerce, according to other people familiar with the company’s plans.
If Amazon can move more transactions to its own rails or get better deals from card companies, it could save more than an estimated $250 million in interchange fees each year, Bain & Co. consultants say.
An independent body, the Postal Regulatory Commission, oversees the rates that the Postal Service charges for its products. By law, the agreements it cuts with corporate customers like Amazon must cover their “attributable costs” that directly result from their use of the postal network.
While the Postal Service is subject to Freedom of Information Act requests, there is an exemption in the federal law that allows it to avoid releasing particulars of its deals with private businesses like Amazon.
Thanks to its significant time-lag between selling an item and paying a supplier (estimated at 80 days by Morningstar) Amazon has been able to self-fund its growth almost entirely from cash from operations over its 25-year corporate history. In fact they last tapped the equity markets for funding in 2003, and in the last quarter of 2017 reported $6.5bn of free cash flow.
In the US, it has more subscribers than all of the cable TV companies combined, and it has a penetration rate of about 40% of all US households. And it’s still growing. Based on its massive global subscriber base, Netflix is now the 2nd largest pay TV service in the world behind just China Radio & TV. Yet Netflix is still growing subscribers at a 20% clip.
None other than the “Cable Cowboy”, John Malone, the business genius who pioneered the development of cable TV, shares our view on this topic. Talking to CNBC last year, Malone said that the most important question in the TV industry is “Can Netflix get enough scale that nobody really can challenge them?” and then went on to say that in his opinion the traditional pay TV companies no longer have any chance of overtaking Netflix. When the interviewer asked if the pay TV industry could band together to create their own Netflix-like service as Malone had been urging for years, he simply replied “It’s way too late.”
At the moment, this conversation involves a healthy dose of education. “What we say is that we’ll be there with you,” Jackson recounts. “We’ll help you scout deals, we’ll help you evaluate whether they’re real, we’ll help you know what to negotiate for, because most of these folks, they’re trying to make a part, and so what we can do for them is be sort of their in-house consulting firm.” But she adds that there will likely come a time where Apple will require suppliers to run their businesses on clean energy as a condition of a business relationship.
Chegg is a company we own right now where the historical data looks awful and it’s because they just sold a business, and the performance of this asset intensive textbook rental, that’s what’s in the historical data. The performance of the asset light, super high incremental margin study business is buried in the segment results…
The legacy business for Chegg is textbook rental…of course, this is a business that’s fairly easily replicable, there are very low barriers to entry and so Amazon and Barnes and Noble essentially crushed them in the textbook rental business. The founders were fired by the venture capitalists who poured $220mn into the business, a new CEO was brought in, and he realized that the only asset Chegg had at that point was a brand. They had 60%, maybe 70% unaided name recognition on college campuses…so, they invested in a bunch of other businesses and the one that’s worked out really well for them is essentially building a digital library of step-by-step answers to end of chapter study questions. So, if you took engineering or math or organic chemistry, there’s going to be a series of questions at the end of the chapter, so did you understand what you just read, and if you didn’t you probably won’t do so well on the test. What they’ve done is gotten exclusive licenses for 27,000 ISBNs and answered every single question and indexed it on Google, that being pretty important because the college student today copies and pastes. They copy the question and they put it in Google and search on it. Chegg comes up as the first organic result, which is how their user base has gone up 2.5x in 3 years with marketing costs being the same as they were 3 years ago…
Now Chegg has to pay money, big money, for those licenses to get that content, and so to some extent the publishers – Pearson and McGraw Hill – do have a lever over Chegg in that respect. We think those relationships are good, they recently renewed one of their licenses at similar cost to what it was a few years ago, largely because the publishers themselves are struggling and this is a very high margin source of income for them. And most college students, they’ve never heard of Pearson, that name means nothing to them. So if Pearson were to take all their textbooks and try to do this themselves, we think the marketing costs would be enormous…you do have some crowd sourced competitors to Chegg, where students basically post their own answers but here’s the thing. When you think about the value to a student of getting a 3.5 instead of a 3.0 GPA or passing a certain class that’s required of their major, the marginal benefit of paying $14.95/month for Chegg and knowing it’s the right answer…vs. just crowd-sourcing it on reddit, it’s a good cost-benefit.
So Workiva, they have 96% client retention, 106% revenue retention because they keep upselling clients. And what they did is create a product that lets companies do SEC filings much more efficiently than the old way, which was mark up a pdf and send it to RR Donnelley and the Donnelley sends it back to you and then you mark it up and send it back to them…so needless to say, [Workiva] went from 0% to 50% share in 6 years. In fact, the people who do external reporting – they’ve got 80% share of the Fortune 500 right now – people actually won’t go to work for another firm that doesn’t use Workiva…
It’s not an easy product to create because essentially what they had to do was replicate Excel in the cloud and enable it for scores of simultaneous users. There’s no check-in/check-out the worksheet. And then also the data points get linked inside your enterprise and so you might way we need to report this EBIT line, well that’s the function of Bob here and Jane over there, and their numbers roll up into mine and I link that inside my enterprise, so if you had a new product you’d have to break all those links and re-integrate it. So, not impossible but external reporting teams, even Wal-Mart, a huge company, their external reporting team’s like 20 people, so it’s feasible to do a rip-and-replace. But where things get interesting for this business and where the TAM gets much larger is internal reporting, where you’re rolling up data across the entire enterprise and then putting it together for the CFO/CEO or whatever, because then the linkages get much greater and the number of users becomes much bigger and the more users you have within an entity whose workflow would be disrupted if you got a new product, the stickier the product becomes…
In Workiva’s example, their customer acquisition costs really spiked about a year and half, two years ago because instead of going after the broader internal reporting market, they tried to pivot going from the SEC market to the Sarbanes Oxley market, SOX reporting, which didn’t work very well because with external reporting you were just saying ‘hey, you should just use Wdesk instead of Donnelley or Merrill…our product is superior’. Customer goes ‘why, yes it is.’ There is no SOX product, there is no product for SOX reporting, it’s a whole bunch of cludged together internal processes, so that’s a much harder sale, going in and saying ‘pay money for a product that is replacing an internal process that you’re not actually paying money for, it’s just sort of wasting people’s time’. That’s harder to put a number on if you’re a CFO or CEO, so that really spiked up their customer acquisition costs. Once they pivoted back to enterprise sales and frankly just reorganized their sales force geographically instead of functionally – which means less travel – customer acquisition costs came back down.
Whatever your business, build a business model that includes all of your assumptions — and build the model so you can pressure-test variables and find your levers. Once you’ve identified them, build MVPs to test those assumptions in more detail. It’s really important to experiment early and get some good data on what works (and what doesn’t), before you start ramping up and pouring lots of money into marketing and execution. Some changes can have exponential effects — for better or for worse.
Shipping wine in the country is tightly controlled by a web of state laws, and it is illegal for individuals to ship wine themselves across state lines. Having wine storage in different states can ensure that collectors get the wine they want regardless of where they live.
Storage fees can be as low as $1.25 a month per case of wine, which holds 12 regular bottles or six magnums. Of course, wine collectors rarely store just one box, and they are not putting it there for just a month.
Ms. Downey offered advice and provided counterfeit-detection tools for seminar participants, including a jeweler’s loupe, a measuring tape, a UV light and UV-visible pens. She outlined her authentication process, which begins with careful scrutiny of the wine bottle—the loupe proved handy here—notably the label, the paper it’s printed on and the printing method and ink, as well as other components such as the capsule and the cork. Ultra-white paper, detectable under UV light, wasn’t in commercial use until the 1960s. With the aid of a microscope, one could detect if the paper was recycled, which would mean the wine couldn’t have been produced before the 1980s, when recycled paper was introduced for labels.
Above all, she emphasized that wine fraud isn’t a victimless crime. “It affects people who work very hard to make good wine, who are proud of their wines and their appellation,” she said. “It ruins their reputation and it destroys all their hard work.” With the right tools and a gimlet eye, she believes, we can all play a part in protecting that work.
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.
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.
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.”
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.
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.
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.
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.
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.