Curated Insights 2018.08.31

What will always be true

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.

How TripAdvisor changed travel

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.

How Hollywood is racing to catch up with Netflix

“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.”

Tucows: High reinvestment rate to drive cash flow growth

“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


Fiat Chrysler’s cheapskate strategy for the future of driving

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.

More than money, Berkshire’s Todd Combs coming on Paytm board is the best outcome: Vijay Shekhar Sharma

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.

The massive popularity of esports, in charts

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.

The business of insuring intangible risks is still in its infancy

“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.”

The biggest antitrust story you’ve never heard

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.

Respect the predictive power of an inverted yield curve

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.

Curated Insights 2018.08.10

Climbing the wall of worry: Disruptive innovation could add fuel to this bull market

This explanation of the flattening yield curve seemingly suggests that “this time is different,” but this time is not different in the context of disruptive innovation. During the 50 years ended 1929, the last time that three or more general purpose technology platforms were evolving simultaneously, the yield curve was inverted more than half of the time.1 The disruptive innovations of that time – the internal combustion engine, telephone, and electricity – stimulated rapid real growth at low rates of inflation. Through booms and busts in an era without the Federal Reserve and with minimal government intervention, US real GDP growth averaged 3.7% and inflation 1.1%, while short rates averaged roughly 4.8% and long rates roughly 3.8%.2 The yield curve was inverted. So, this time is not different, but investors do have to extend their time horizons to understand the impact of profound technological breakthroughs on the economy.

They all fall down

$1 invested in Disney in 1970 is now worth $197. $1 invested in the S&P 500 is worth $125, for comparison. The 19,500% return in Disney had plenty of bumps in the road. The stock lost 10% on a single day 11 times, including a 29% loss on October 19, 1987. Disney gained 11.5% for 48 years. But of course, there is a huge difference between 11.5% for 48 years and 11.5% every year for 48 years.

These returns were earned only by those able to withstand a massive amount of pain. Disney experienced 13 separate bear markets over the last 48 years, including an 86% crash during the 1973-74 bear market. The S&P 500 experienced just four over the same time.

Nobody could have known in real-time what the future held for this company, or whether its best days were behind it, but these would have been very real questions during every decline along the way. Disney hit an all-time high in January 1973, and wouldn’t see those levels again until 1986. It made a high in April 2000 and then didn’t get back there until February 2011.

Spotify’s playlist for global domination

This has been Ek’s plan all along: to get the music industry so dependent on Spotify that even the doubters can’t live without it. “We need this company to be robust,” Borchetta says of Spotify. “It’s important to the ecosystem of the whole business that they are successful.”

The Spotify team realized that they needed a mobile product that could be accessed by everyone, not just paying subscribers. And they needed it quickly. They had already been negotiating with labels about licensing rights for a free mobile version, but the deals weren’t done. Nor were engineers ready with a product. The sudden crisis sparked company-wide urgency. When the licensing deals were finally signed, in December 2013, “we literally just pushed the button on the same day to get it out there,” says Soderstrom of the new app. There was no time for rigorous testing. “If it had taken another six months, it might have been too late to recover.” The strategy worked: At the end of 2013, Spotify had 36 million users and 8 million paying subscribers; by January 2015, it announced 60 million and 15 million, respectively. Forty-two percent of time spent on Spotify was now via phones and 10% on tablets, the first time mobile listening surpassed desktop.

The new free tier has been a top priority for more than a year. It reflects how important it is for the company to keep acquiring new customers (and turn them into paying ones), but it also has its own commercial element. “Billions of people listen to radio, and most of that today isn’t monetized very efficiently,” Ek says as we chat on the couch in his Stockholm office. “Commercial radio, that’s conservatively a $50 billion industry globally. The U.S. radio industry is $17 billion, close to the size of the whole global recorded music industry, which is $23 billion. And what do people listen to? Primarily music.” Ninety percent of Spotify’s current revenues come from subscriptions, but if the free product expands, so can Spotify’s radiolike advertising business. As Ek notes, with typical understatement, “We still have a lot of room to grow.”

Ek didn’t see the value at first—”Oh, this is going to be a disaster,” he recalls thinking about one playlist innovation—but playlisting did more than increase Spotify’s consumer appeal. It turned Spotify into a user’s personal DJ. The company told investors in its prospectus, filed last February, that “we now program approximately 31% of all listening on Spotify” via playlists, which has created powerful new brands within Spotify such as Rap Caviar and ¡Viva Latino!. There are now Rap Caviar and ¡Viva Latino! concert series, pointing the way toward an even broader role for the company within the music business, where it’s generating live event and merchandising revenue without having to pay record labels.

He’s succeeded in the [music] business because he’s extremely patient and not high on his own supply, meaning he has not been susceptible to the vices that ruin people in entertainment. Ek’s personality has opened the door to a different kind of relationship with musical artists from what prevailed in the era of cocaine-snorting, thieving record execs. So far, Ek has been focused on changing how creators get paid; in streaming, an artist is compensated every time a song is played, creating lifetime revenue (albeit a fraction of a penny at a time), whereas in the old model they got paid (sometimes) after selling a CD or download. But that’s only the beginning. “Spotify’s first eight to 10 years were focused on consumers,” says R&D chief Soderstrom. “The next eight to 10 will be focused on artists.”

Spotify for Artists is the most visible example of this new directive. The service, which launched in its current form in 2016, allows musicians to access data on who is listening to their work on the platform and to personalize their presence to enhance engagement. Iconic rock band Metallica, which once helped sue Napster out of existence, used this data on tour to customize its setlists based on what local fans listen to most. Smaller artists have used it to identify where to tour, and to activate their superfans. “Whatever your genre is, you can find an audience,” says Spotify chief marketing officer Seth Farbman.

Ek has been talking a lot this year about Spotify’s mission to get 1 million artists to make a living off the platform, but he doesn’t mean there will be 1 million Lady Gagas or Bruno Marses. Financial analysts often compare Spotify to Netflix—a comparison Ek pushes back against—but Ek’s vision of the future looks more like YouTube: a meeting spot for creators and fans, in groups both large and small, and Spotify benefits when transactions happen in this “marketplace.” Ek says: “In that model, it’s almost like you’re managing an economy.”

“The major-label system was built out for the 5,000 biggest artists in the world,” Carter notes. “If we’re going to [enable] a million artists to make a living, that’s going to require an entirely different ecosystem.” In this world, “an artist might be happy making $50,000 a year, supplementing income from other work to help pay their mortgage, raise their kids, by doing what they love. I’m just as committed to that kind of artist. How do we make it so there are a lot more winners,” Carter says, “to redefine what it means to be a winner?”


The definitive timeline of Spotify’s critic-defying journey to rule music

May 2013: Spotify makes its first acquisition: Tunigo, which already helped users find, create and share new music and playlists on Spotify. Turned out to be a good one! It still underpins the company’s editorial playlist strategy to this day.

March 2014: Spotify acquires The Echo Nest, a startup that specializes in using machine learning to make recommendations and predict the type of music users will want to listen to, generating playlists from that data as well as helping advertisers reach those music fans. This also was a great acquisition! It underpins the algorithmically generated playlists such as Discover Weekly.

Is a change goin’ to come?

Last year, according to the IFPI, global revenues for recorded music (as opposed to live performance) grew 8.1 per cent to $17.3bn, driven by digital revenue’s 19.1-per-cent increase to $9.4bn. Of this digital revenue, streaming did the heavy lifting, as the $6.6bn from subscriptions and advertising constituted a 41-per-cent increase from the previous year. In what perhaps will be seen as a watershed moment, digital revenues accounted for the highest proportion of total recorded revenues for the first time ever, at 54 per cent. In nominal terms, music-industry revenues are still 32 per cent below its 1999 peak. Convert the dollars from Prince’s favourite year to today’s, and you’ll find artists, labels, publishers and the like are earning 54 per cent less than they used to.

Despite the launch of advertising channel Vevo, which Mr Morris led, musicians are still getting nickel-and-dimed by Alphabet’s platform and its competitors. Last year, video streaming accounted for a mammoth 55 per cent of all music listened to online, according to the IFPI. In turn, it only contributed 15 per cent of the revenues that Spotify and friends did.

FAANGs are more solo acts than a tech supergroup

The five biggest stocks in the S&P 500 have accounted for an average of 12.3 percent of the index since 1990, the earliest year for which numbers available. By comparison, the index’s allocation to the five FAANGs is 12.8 percent.

There are lots of surprises. First, not all FAANGs are growth stocks, as measured by historical earnings and revenue growth and predicted earnings growth. Apple, for example, scores a negative 0.1 for growth. Google’s growth score is a modest 0.4.

Second, they’re not all wildly expensive, based on stock price relative to book value, earnings, cash flow and other measures. Apple is slightly more expensive than average, with a value score of 0.05. Google and Facebook score a negative 0.45 and 0.39 for value, respectively — not cheap but far from the richest.

Third, some are higher quality than others, as measured by profitability, leverage and stability of operating results, and not in the order investors might think. Apple has a reputation for sky-high profits and reliable revenue, and yet it scores 0.15 for quality. Meanwhile, Netflix spends lavishly on programming and has negative cash flow, and its quality score is 0.63 — second only to Google’s score of 0.68.

Nor is it likely that the FAANGs will ever have much in common because their attributes are constantly changing. Apple, for example, was a much different bet five years ago, scoring high for growth and low for quality and momentum. The probability that all five stocks will be similarly situated at any given time is exceedingly low.

Elon Musk has some fun with Tesla

Now Tesla does have debt: It has three different convertible bonds, but it also has $1.8 billion of straight bonds that it issued last August to quite receptive investors. Those bonds have sold off since issuance and are rated Caa1 at Moody’s, which, again, are not auspicious signs for adding like 20 times as much debt. And my general assumption about Tesla bonds is that they operate on sort of a Netflix theory, in which bondholders get their security not from the company’s cash flows but from the knowledge that there’s a whole lot of equity value beneath them. If you issue billions more dollars of bonds to get rid of that equity, then why would anyone buy the bonds? FT Alphaville notes that the pressure of public markets, for Tesla, “surely pales in comparison to the pressure to maintain bank/ bond covenants and make interest payments.” “Even if say $40 billion could be financed in the high yield market,” note analysts at Barclays, “the annual interest bill would consume $2.7 billion in cash.”

The eight best predictors of the stock market

• The Philosophical Economics blog’s indicator is based on the percentage of household financial assets—stocks, bonds and cash—that is allocated to stocks. This proportion tends to be highest at market tops and lowest at market bottoms. According to data collected by Ned Davis Research from the Federal Reserve, this percentage currently looks to be at 56.3%, more than 10 percentage points higher than its historical average of 45.3%. At the top of the bull market in 2007, it stood at 56.8%. This metric has an R-square of 0.61.

• The Q ratio, with an R-squared of 46%. This ratio—which is calculated by dividing market value by the replacement cost of assets—was the outgrowth of research conducted by the late James Tobin, the 1981 Nobel laureate in economics.

• The price/sales ratio, with an R-squared of 44%, is calculated by dividing the S&P 500’s price by total per-share sales of its 500 component companies.

• The Buffett indicator was the next-highest, with an R-squared of 39%. This indicator, which is the ratio of the total value of equities in the U.S. to gross domestic product, is so named because Berkshire Hathaway Inc.’s Warren Buffett suggested in 2001 that is it “probably the best single measure of where valuations stand at any given moment.”

• CAPE, the cyclically adjusted price/earnings ratio, came next in the ranking, with an R-squared of 35%. This is also known as the Shiller P/E, after Robert Shiller, the Yale finance professor and 2012 Nobel laureate in economics, who made it famous in his 1990s book “Irrational Exuberance.” The CAPE is similar to the traditional P/E except the denominator is based on 10-year average inflation-adjusted earnings instead of focusing on trailing one-year earnings.

• Dividend yield, the percentage that dividends represent of the S&P 500 index, sports an R-squared of 26%.

• Traditional price/earnings ratio has an R-squared of 24%.

• Price/book ratio—calculated by dividing the S&P 500’s price by total per-share book value of its 500 component companies—has an R-squared of 21%.

It’s not terribly hard to find a measure that shows an overvalued market. Then, use a long time period to show the market has performed below average during your defined overvalued period. That’s easy. The difficulty is timing the market. For example, during the housing bubble, what I found interesting was how many people were right, that housing was indeed in a bubble. Lots of people realized it. Also, lots of people thought it would burst in 2004. Then in 2005. Then in 2006. They were right, but their timing was way off. Even if you know the market is overpriced, that doesn’t tell you much about how to invest today.


Hot chart: The A-D Line is roaring higher

You have two options as an investor: you could listen to the media or you could listen to the market. They’ve been pushing the notion lately that only a handful of Tech stocks are leading the way for the market, suggesting a weakening breadth environment. In the real world, however, we are participating in a united rally among Tech stocks as a group.

In fact, the Equally-Weighted Technology Index went out just 0.4% away from another all-time weekly closing high, just shy of it’s record high set last month. This is the Equally-Weighted Index, not the Cap-weighted index that the bears are suggesting is pointing to weakening breadth because the big names are such a large portion. If it was true that only a handful of names are going up and market breadth is deteriorating, the Equally-weighted index, which takes the extra-large market capitalization stocks completely out of the equation, would not be behaving this way.

So when someone tells you that breadth is weakening and only a handful of names are driving the market’s gains, you know they haven’t done the work themselves. They’re just regurgitating what they read or overhead somewhere, which happens a lot.

Natural maniacs

A problem happens when you think someone is brilliantly different but not well-behaved, when in fact they’re not well-behaved because they’re brilliantly different. That’s not an excuse to be a jerk, or worse, because you’re smart. But no one should be shocked when people who think about the world in unique ways you like also think about the world in unique ways you don’t like.

There is a thin line between bold and reckless, and you only know which is which with hindsight. And the reason there’s a difference between getting rich and staying rich is because the same traits needed to become rich, like swinging for the fences and optimism, are different from the traits needed to stay rich, like room for error and paranoia. Same thing with personalities and management styles.

“You gotta challenge all assumptions. If you don’t, what is doctrine on day one becomes dogma forever after,” John Boyd once said.

These maxims are always true

In 1962, Warren Buffett began buying stock in Berkshire Hathaway after noticing a pattern in the price direction of its stock whenever the company closed a mill. Eventually, Buffett acknowledged that the textile business was waning and the company’s financial situation was not going to improve. In 1964, Stanton made an oral tender offer of $11​1⁄2 per share for the company to buy back Buffett’s shares. Buffett agreed to the deal. A few weeks later, Warren Buffett received the tender offer in writing, but the tender offer was for only $11​3⁄8. Buffett later admitted that this lower, undercutting offer made him angry.[12] Instead of selling at the slightly lower price, Buffett decided to buy more of the stock to take control of the company and fire Stanton (which he did). However, this put Buffett in a situation where he was now majority owner of a textile business that was failing.

Being stubborn can cost you money. Buffett has talked about that at length over the years. But what is interesting is Buffett operated Berkshire from 1962 to 1985 and made millions of dollars without doing any publicity. No mass media. No hype. Can you imagine that today?

You know what gets you more customers? Execution. Delighting them. Focusing on them.

Scorched earth: the world battles extreme weather

Lloyds, the London-based insurance market, estimates that as much as $123bn in global gross domestic product in cities could be at risk from the impact of a warming planet, including windstorms and floods.

Meanwhile a 2015 study by the journal Nature found that due to climate change, global incomes were likely to be one-fifth lower in 2100 than they would be with a stable climate. And later this year the UN will issue a landmark report that quantifies the impact of 1.5C of warming, compared with 2C. Leaked copies suggest that the world will pass the 1.5-degree warming target by about 2040.

Curated Insights 2018.08.03

Once in a lifetime, if you’re lucky

Apple did it the old fashioned and the new fashioned way – great products, great marketing, incredible innovation, brilliant people, global supply chain, incessant improvements and updates, buybacks and dividends, R&D and M&A, domestic hiring and international outsourcing, wild creativity and diligent bean-counting. They had it all and used it all. It’s an amazing story. Many of us were able to be along for the ride.


Business lessons from Rob Hayes (First Round Capital)

It is a red flag for me if the founders have 20 slides in their deck on their product and are not getting into issues like distribution, team or other parts of the business. There have been very few products that cause people to beat a path to the door of the business on their own [like Google or Facebook]. Successful companies almost always have operators running them who know how to market, sell, manage an income statement and hire.


Why do the biggest companies keep getting bigger? It’s how they spend on tech

The result is our modern economy, and the problem with such an economy is that income inequality between firms is similar to income inequality between individuals: A select few monopolize the gains, while many fall increasingly behind.

The measure of how firms spend, which Mr. Bessen calls “IT intensity,” is relevant not just in the U.S. but across 25 other countries as well, says Sara Calligaris, an economist at the Organization for Economic Cooperation and Development. When you compare the top-performing firms in any sector to their lesser competition, there’s a gap in productivity growth that continues to widen, she says. The result is, if not quite a “winner take all” economy, then at least a “winner take most” one.

What we see now is “a slowdown in what we call the ‘diffusion machine,’” says Dr. Calligaris. One explanation for how this came to be is that things have just gotten too complicated. The technologies we rely on now are massive and inextricably linked to the engineers, workers, systems and business models built around them, says Mr. Bessen. While in the past it might have been possible to license, steal or copy someone else’s technology, these days that technology can’t be separated from the systems of which it’s a part.

This seemingly insurmountable competitive advantage that comes with big companies’ IT intensity may explain the present-day mania for mergers and acquisitions, says Mr. Bessen. It may be difficult or impossible to obtain critical technologies any other way.

Everything bad about Facebook is bad for the same reason

Facebook didn’t intend for any of this to happen. It just wanted to connect people. But there is a thread running from Perkins’ death to religious violence in Myanmar and the company’s half-assed attempts at combating fake news. Facebook really is evil. Not on purpose. In the banal kind of way.

Underlying all of Facebook’s screw-ups is a bumbling obliviousness to real humans. The company’s singular focus on “connecting people” has allowed it to conquer the world, making possible the creation of a vast network of human relationships, a source of insights and eyeballs that makes advertisers and investors drool.

But the imperative to “connect people” lacks the one ingredient essential for being a good citizen: Treating individual human beings as sacrosanct. To Facebook, the world is not made up of individuals, but of connections between them.

The solution is not for Facebook to become the morality police of the internet, deciding whether each and every individual post, video, and photo should be allowed. Yet it cannot fall back on its line of being a neutral platform, equally suited to both love and hate. Arendt said that reality is always demanding the attention of our thoughts. We are always becoming aware of new facts about the world; these need to be considered and incorporated into our worldview. But she acknowledged that constantly giving into this demand would be exhausting. The difference with Eichmann was that he never gave in, because his thinking was entirely separated from reality.

The solution, then, is for Facebook to change its mindset. Until now, even Facebook’s positive steps—like taking down posts inciting violence, or temporarily banning the conspiracy theorist Alex Jones—have come not as the result of soul-searching, but of intense public pressure and PR fallout. Facebook only does the right thing when it’s forced to. Instead, it needs to be willing to sacrifice the goal of total connectedness and growth when this goal has a human cost; to create a decision-making process that requires Facebook leaders to check their instinctive technological optimism against the realities of human life.

Thinking about Facebook

If you accept that assumption, 35% EBIT margins on $97 billion in sales would equal $34 billion in operating income. Inversely, that implies more than $60 billion in expenses (COGS + OpEx). This suggests that Facebook’s run rate expenses will more than triple from 2017 to 2022. Over that same period, these assumptions would result in cumulative revenue growth of around 140%.

Let me give you one example to show just how much money we’re talking about here (over $40 billion in annual expenses). It’s assumed that Facebook will need to hire many people for its safety and security efforts. If it adds an additional 20,000 employees and pays them $200,000 each (not a bad salary!), that would cost them $4 billion a year. For some context, Facebook announced back in October that it planned on hiring an additional 10,000 safety and security personnel by the end of 2018. I’ve tried to give them plenty of room, and this still only covers roughly 10% of the incremental costs we need to account for to push operating margins to the mid-30s.

Here’s my point: I have a tough time understanding how Facebook can possibly need to spend this much money. It seems to me that this is largely a choice, not a necessity.


Apple’s stock buybacks continue to break records

No company has bought back more shares since 2012 than Apple. It has repurchased almost $220 billion of its own stock since it announced in March 2012 that it would start to buy back shares. That is roughly equivalent to the market value of Verizon Communications. Over that period, the number of Apple’s shares outstanding has dropped by just over a quarter.

Waymo’s self-driving cars are near: Meet the teen who rides one every day

Tasha Keeney, an analyst at ARK Invest, says that Waymo could choose to offer an autonomous ride-hailing service today at around 70 cents a mile—a quarter of the cost for Uber passengers in San Francisco. Over time, she says, robotaxis should get even cheaper—down to 35 cents a mile by 2020, especially if Waymo’s technology proves sturdy enough to need few human safety monitors overseeing the autonomous vehicles remotely. “You could see software-like margins,” Keeney says.

Bill Nygren market commentary | 2Q18

A closer look reveals that Gartner stock fell when management opted to substantially increase selling and marketing expenses to pursue accelerated organic growth, which in turn decreased the company’s reported earnings. The way GAAP (generally accepted accounting principles) works, because the future benefit of a marketing expense is uncertain, the cost is immediately expensed. But at a company like Gartner, these marketing expenses could easily be seen as long-term investments in company growth. That’s because a Gartner customer tends to remain with the company for a long time—a little more than six years, on average. So we adjusted the sales and marketing expenses to reflect a six-year life, just like GAAP would treat the purchase of a machine that was expected to last six years. With that one adjustment, Gartner’s expected EPS increased by almost $3. Using our adjusted earnings, which we believe reflect a more realistic view of those intangible assets, Gartner appears to be priced as just an ordinary company.

Ferrari slumps after CEO says Marchionne target is ‘aspirational’

Ferrari is banking on Camilleri getting up to speed quickly to press ahead with Marchionne’s plan. While Marchionne was planning to retire from Fiat Chrysler in 2019, he was meant to stay on at Ferrari for another five years. His succession plan was not as advanced at the Maranello-based company as it was at FCA.


WeWork is just one facet of SoftBank’s bet on real estate

If the market opportunity is big, SoftBank will typically make investments in regionally dominant companies operating in that sector. After all, if worldwide dominance is difficult to obtain for any one company, SoftBank is so big that it can take positions in the regional leaders, creating an index of companies that collectively hold a majority of market share in an emerging industry.

Heineken inks $3.1 billion deal to grow in hot China market

The deal will help Heineken gain a tighter foothold in a crowded field by leveraging China Resources Beer’s extensive distribution network, while also sharing in the returns of China’s beer market leader. China is now the second-largest premium beer market globally, and is forecast to be the biggest contributor to premium volume growth in the next five years.

Under the deal, Heineken’s operations in the country will be combined with those of China Resources Beer, and the Dutch brewer will license its brand to the Chinese partner on a long-term basis, according to company statements Friday. China Resources Beer’s parent company will acquire Heineken shares worth about 464 million euros ($538 million). Heineken will also make its global distribution channels available to China Resources’ brands including Snow, according to the statement.

Branded Worlds: how technology recentralized entertainment

There are two answers to the first question: cost and time. Maybe it’s a lot easier to shoot and edit movies/TV than it used to be, but sets, locations, actors, scripts — those are all expensive and difficult. Better amateur work is still far from professional. And while it’s true we’re seeing interesting new visual modes of storytelling, e.g. on Twitch and YouTube, it’s very rarely narrative fiction, and it’s still distributed and monetized via Twitch and YouTube, gatekeepers who implicitly (and sometimes explicitly) shape what’s popular.

More importantly, though, democratizing the means of production does not increase demand. A 10x increase in the number of TV shows, however accessible they may be, does not 10x the time any person spends watching television. For a time the “long tail” theory, that you could make a lot of money from niche audiences as long as your total accessible market grew large enough, was in vogue. This was essentially a mathematical claim, that audience demand was “fat-tailed” rather than “thin-tailed.”

China is building a very 21st century empire—one where trade and debt lead the way, not armadas and boots on the ground. If President Xi Jinping’s ambitions become a reality, Beijing will cement its position at the center of a new world economic order spanning more than half the globe. Already, China has extended its influence far beyond that of the Tang Dynasty’s golden age more than a millennium ago.
It used to be the case that active portfolio management was the default investment style. Over time, and with the help of academic finance, we have come to realize that there are other factors at work. The most obvious of which is the market factor or beta. It is this insight that underlies the rise in index investing. A trend which by all accounts is still in place.

Curated Insights 2018.06.29

75% of bull markets are nothing but multiple expansion

Hedge funds’ best ideas? Those are just stocks they’re dumping

“This suggests that the pitched stocks were their ‘best ideas’ but not likely any longer. Returns of pitched stocks diverged from market immediately after the pitches—long pitches spike up and short pitches spike down. These results suggest that these investment conferences are closely followed by other investors and have high market impacts. The majority of the outperformance occurs before the pitches. Outperformance after the pitches are likely driven by inflows from other investors that follow these investment conferences.”

Amazon’s scale in Japan challenges rivals and regulators

In the wake of Amazon’s rise, Rakuten, its largest Japanese rival, which operates the country’s biggest online marketplace, has expanded aggressively into financial technology, mobile phones and home-sharing. Still, to compete better against Amazon, the company is aiming to create its own logistics and delivery network within two years. Unlike its US rival, it had left warehouse and inventory management to the retailers that use its marketplace rather than building its own proprietary systems.

Amazon held a 23 per cent share in Japan’s internet retail market compared with Rakuten’s 18.5 per cent share last year, after overtaking its Japanese rival in 2016, according to Euromonitor. Other industry data shows the two rivals in a tight race.

“There is no way rivals can compete against Amazon. They invest in the best-in-class technology with little regard for profits so that they can create a sophisticated logistics operation,” said Shinichiro Nishino, a former Amazon executive who was hired by Mr Bezos to launch the business in Japan.


Amazon wants the whole package in delivery

Amazon plans to provide entrepreneurs known as “Delivery Service Partners” with guaranteed delivery volume, use of Amazon’s logistics technology, and discounts on Amazon-branded delivery van leases, vehicle insurance, Amazon uniforms, and even fuel. The company envisions hundreds of owners operating fleets of 20 to 40 vehicles and eventually having “tens of thousands of delivery drivers across the U.S.,” Amazon trumpeted in its press release.

The independent contractor owner-operator model is similar to how FedEx handles its last-mile deliveries, while UPS delivery trucks are staffed by unionized employees, Blackledge writes. Amazon has been steadily encroaching on all parts of the traditional delivery firms’ turf in recent years, with initiatives including a delivery service for small businesses, building its own air cargo hub, and even expanding into ocean freight shipping. Amazon already boasts a fleet of 7,500 trucks, 35 aircraft, and over 70 delivery centers. This pales in comparison, however, to FedEx’s stated world-wide armada of 650 planes, 150,000 delivery trucks, 400,000 employees, and 4,800 fulfillment facilities.

Danny Meyer’s recipe for success

Rather than rolling out replicas of USC in other cities, as is a common tactic for ambitious restaurant empire builders, Meyer employed a different strategy. Sticking close to home, Meyer expanded by replicating his enlightened hospitality, cultivating regulars, and stimulating buzz by endowing each new restaurant with its own memorable menu and décor.

“The fact that Danny has been so successful translating the culture across so many different restaurant brands, and engaging a lot of people to help him, is key to understanding the quality and influence of the culture he inspired. He happens to be in the restaurant business, but if he had been a university president, you would have a different kind of college. When he looks at you, he sees you. He’s not playing the role of an executive. He’s a hugger. He trusts his gut, and his gut is always working.”

Meyer never set out to be a business mogul. He simply wanted to create a homey, unpretentious, and affordable Michelin star–quality restaurant that did not exist in New York in the 1980s. Unlike the dominant, ultra-expensive, and exclusive French haute cuisine establishments, such as Le Pavillon and Lutèce, which oozed effeteness, Meyer wanted USC customers to feel comfortable asking their server, or even the sommelier, to explain and pronounce menu items. He wanted people walking in without a reservation to feel welcome ordering a full-course meal at the bar.

Stewarding the culture in association with every business decision is the main responsibility and passion for Meyer, who recently turned 60, and is not slowing down. Also on his agenda? Creating a few more fine casual brands, such as Shake Shack and Tender Greens, and making them all as essential to millennials as McDonald’s once was to boomers.

All the questions you wanted answered about Bird Scooters and their recent $300 million funding

Capital. Because Bird was first to market, extremely innovative, quick to hire talented leadership and an experienced founder it was able to raise $125 million in an extraordinarily short period of time. That has allowed the company to launch in many markets, build amazing applications, design future versions of the scooter and monetize while many companies are still just drawing up their go-to-market plans. This allowed Bird to then raise $300 million from some of the top VCs in the country. Capital of course drives scale advantages and when you have “winner take most” markets it also has a way of scaring away some investors from investing in the 3–5th “me too” competitors. You can expect some strong competition, but it’s unlikely that there will be 5 great scooter companies.

Density. One huge advantage the early-movers have is “density.” A dockless eScooter solution is only compelling if you believe that you’ll always be able to find a scooter in a relatively short walking distance or it defeats the purpose. If Bird has thousands of scooters in a neighborhood (and if it can acquire these scooters at cheaper prices due to scale advantages) then it’s significantly more difficult for new entrants to launch without serious capital and it’s hard to get serious capital from investors who perceive you’re late to the game.

Data. Bird already has an enormous lead in data collection. What appears as just an electric-powered scooter is really a computer with wheels. Between our on-board CPUs and your mobile phone companions we have an enormous amount of data on transportation routes, where riders want to pick up scooters in the morning and where they leave them in the evening. This not only allows Bird to have advantages in right-sizing city inventory levels and proper placement to maximize yield, but the company has already been providing this data to cities to help them better plan their cities of the future. We clearly need a world in which gas cars don’t dominate dense city environments and providing this data to cities is a great start in that direction.

Mechanics. What is even more remarkable than “chargers” is how Bird has build out local teams of mechanics in each market, providing large legions of skilled labor the ability to earn meaningful dollars for repairs to wheels, brakes, cables, batteries, electronics, etc. Local politicians wanting to see local job creation rather than jobs at tech firms all migrating to San Francisco should be heartened. Because each market won’t have unlimited labor suppliers of repair people and because the largest services can pay the best, there is inherent advantage in capturing the early pools of mechanics.


How WeWork’s revenue-sharing leases could affect property investors

Both WeWork and THRE are keeping details of the revenue-sharing lease under wraps but, broadly, it means that WeWork does not have to pay a fixed amount of rent. If it is doing badly and cannot attract tenants, it pays less — or nothing — to its landlords, THRE and PFAE. Conversely, if it does well, it can pay more.

This has implications for property investors. By offering an uneven and potentially volatile income stream in place of a steady and fixed one, a lease of this kind changes the bond-like nature of property as an asset class into something closer to an equity.


The business of death has a bright future in Japan

The funeral business has a bright future in Japan, where deaths have outpaced births every year since 2007. Almost 30 percent of the population is 65 or older. And this year is a tipping-point of sorts. After 2018, the number of Japanese women of child-bearing age will decline so sharply that by 2025 the population is forecast to drop by four million people, equivalent to the population of Los Angeles.

Trump tariffs would be bad for the entire global auto industry, says Moody’s

Daimler AG, BMW and Volkswagen AG all import more than half the vehicles they sell in the U.S. from other countries. The breakdown is 50% for Daimler, 70% for BMW and above 80% for VW. “However, these imports represent only about 12% of BMW’s total annual unit sales, about 8% of Daimler’s global light vehicle sales, and around 3% of VW group sales (figures include sales from Chinese joint ventures),” said Clark. “On the other hand, BMW and Daimler export more than half the vehicles they produce at their U.S. assembly plants. Fiat Chrysler Automobiles NV produces about half its vehicles in the U.S., with the remaining units imported mainly from Mexico and Canada.”

Moody’s estimates that Toyota exports roughly 22% of cars produced in Japan to the U.S., while Nissan exports about 31% of its domestic production to the U.S. market. Honda has the most diversified production of the three and a low ratio of exports to the U.S. but is planning to increase exports in 2018. Korean car makers Hyundai Motor Co. and Kia Motors Corp. import a bit more than half their vehicles sold in the U.S., mostly from Korea but also from Mexico. Both were planning to produce more SUVs and crossovers in the U.S. in the next two years.

Mexico would be hurt more than other markets as many big car makers have assembly plants there to serve the U.S. market. Mexico produced 3.8 million vehicles in 2017, 82% of which were exported. Of that total, 84% went to the U.S. and Canada. In the first quarter of 2018, the car industry accounted for 2.9% of Mexico’s GDP, meaning tariffs would hurt more than the car manufacturers and auto-parts suppliers.

One group that will be especially hard hit is U.S. car dealers, which rely heavily on imports. “These companies have minimal U.S.-produced vehicle penetration to offset reduced sales from price increases on imported vehicles,” said the report.

Where 3 million electric vehicle batteries will go when they retire

By 2030, there will be a 25-fold surge in battery demand for EVs. Automobiles have overtaken consumer electronics as the biggest users of lithium-ion batteries, according to Paris-based Avicenne Energy. By 2040, more than half of new-car sales and a third of the global fleet –- equal to 559 million vehicles — will be electric. By 2050, companies will have invested about $550 billion in home, industrial and grid-scale battery storage, according to BNEF.

Introducing a16z crypto

Trust is a new software primitive from which other components can be constructed.

The new primitive of trust also means that 3rd-party developers, entrepreneurs, and creators can build on top of crypto-powered platforms without worrying about whether the rules of the game will change later on. In an era in which the internet is increasingly controlled by a handful of large tech incumbents, it’s more important than ever to create the right economic conditions for developers, creators, and entrepreneurs. Trust also enables new kinds of governance where communities collectively make important decisions about how networks evolve, what behaviors are permitted, and how economic benefits are distributed.

Cryptogoods can unlock new experiences and business models for games and other forms of media.


Ten lessons from Michael Batnick’s book ‘Big Mistakes’

Ben Graham understood that no approach works all the time. There are time and place for everything. Markets evolve and some concepts stop working. A margin of safety doesn’t matter during periods of forced liquidation, especially when you are leveraged to the hill.

A high IQ guarantees you nothing! This is one of the hardest things for newer investors to come to grips with, that markets don’t compensate you just for being smart.” and “Intelligence in investing is not absolute; it’s relative. In other words, it doesn’t just matter how smart you are, it matters how smart your competition is.

The most disciplined investors are intimately aware of how they’ll behave in different market environments, so they hold a portfolio that is suited to their personality. They don’t kill themselves trying to build a perfect portfolio because they know that it doesn’t exist.

Curated Insights 2018.06.24

Tails, you win

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

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


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

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

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

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

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


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

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

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

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

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

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

Google’s half-billion bet on JD.com

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


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

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


Google is training machines to predict when a patient will die

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

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

Adobe could be the next $10 billion software company

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

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


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

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

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

What’s so special about 21st Century Fox?

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

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

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


Disney tests pricing power at theme parks

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

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

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

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

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

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

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

Japan robot makers outperform Europeans in profitability

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

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


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

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

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

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

Why Japan’s sharing economy is tiny

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

Indonesia ecommerce through the eyes of a veteran

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

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

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


Malaysia’s economy more diversified than thought

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

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

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


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

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

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


Study: Charts change hearts and minds better than words do

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

Curated Insights 2018.06.17

What helps or hurts investment returns? Here’s a ranking

An unexpected challenge in performing this exercise is a tendency for some elements to offset others. For example, changes in profits could be offset by widening or contracting price-earnings ratios; sentiment might offset valuation; returns tend to vary inversely with risk. Why does this matter? Because in the real world, one hand giveth while the other taketh away. This concept of cancellation matters a great deal to total portfolio returns.

The overall cost of a portfolio, compounded over 20 or 30 years, can add up to (or subtract) a substantial amount of the returns. One Vanguard Group study noted that a 110 basis-point expense ratio can cost as much as 25 percent of total returns after 30 years. That does not take into consideration other costs such as trading expenses, capital-gains taxes or account location (i.e., using qualified or tax-deferred accounts). The rise of indexing during the past decade is a tacit acknowledgment that on average, cost matters more than stock-picking prowess.

Those people born in 1948 not only managed to have their peak earning and investing years (35-65) coincide with multiple bull markets and interest rates dropping from more than 15 percent to less than 1 percent. They also lucked into a market that tripled in the decade before retirement.

Behavior and discipline > Humility and learning > Longevity and starting early > Valuation and year of birth > Asset allocation > Costs and expenses > Security selection


The forging of a skeptic

I think another thing people have gotten confused about is the sustainable competitive advantage and the moat. Durable competitive advantage and moats are not the same thing as brands. People sometimes use these terms interchangeably. I have also seen people ascribe competitive advantages to brands that don’t have them. For example, retailers — retailers have brands. We all know what Macy’s is, but retailing is fundamentally a bad business.

In essence, the merits of a brand are not the brand itself; they are the qualities of the product that create the consumer loyalty. What attracted him, ultimately, to Coca-Cola is that Coca-Cola’s formula make you more, not less, thirsty, and supposedly has been tested to prove that it doesn’t wear out the palate, no matter how much is consumed. This implies infinite sales potential. The cute commercials and cheery red logo create an association in people’s minds with those qualities. They aren’t what makes it Coca-Cola.

While there are moats that include brands, a brand is not a moat. The moat is whatever qualities are innate to the business that make it difficult to compete with

Worried about big tech? Chinese giants make America’s look tame

They have both funded ventures that offer online education, make electric cars and rent out bicycles. For the giants, such initiatives represent new opportunities for people to use their digital wallets — Ant Financial’s Alipay and Tencent’s WeChat Pay — and new ways to collect data on consumer behavior. Analysts at Sanford C. Bernstein counted 247 investment deals by Tencent in recent years and 156 by Alibaba, though given the pace of the companies’ deal-making, they said their database was “likely to be perennially incomplete.”

In a report this week, Morgan Stanley predicted that by 2027, the total market in China in which Alibaba could be making money will be worth $19 trillion — more than Amazon’s potential market worldwide.

‘As long as they’re unfriendly, it’s a sign they have confidence’

Keyence keeps up compound sales growth of 14 per cent a year (1986-2016) even with sales in the billions of dollars. It takes seemingly simple products such as barcode readers and sells them for five times the cost of manufacture.

Keyence’s first secret is its production outsourcing. It buys raw materials in bulk and sends them to component suppliers; it collects the components and sends them to assemblers and performs the final inspection of goods itself.

The second secret is what Keyence really sells: not a product, but a way to make a factory more efficient. Graeme McDonald, machinery analyst at Citigroup in Tokyo, says the group’s sales engineers “can often provide an idea of how to improve your manufacturing set-up literally on the site with an idea of the payback time and return on investment”. It offers quick victories — such as a sensor to replace manual inspection, for example — not risky projects. “The products they sell are not capital expenditure, they’re cost to the factory manager,” says Mr Noguchi. If the manager can save a $40,000 salary with a $20,000 gadget, they will sign off quickly, without worrying how much Keyence earns.

The products are high quality, if not necessarily unique. Keyence has a modest research budget and less than a tenth of the US patents held by rival automation companies such as Fanuc.

Fanuc in trouble? Talk to the (robot) hand

Fair enough, it’s a tough world for all iPhone dependents. Here’s a wrinkle in the bear-case thesis, though: Overseas shipments of robots and Robodrills from Yokohama, while down elsewhere, are up sharply to Asia. The volume of robots shipped by the port – mostly Fanuc’s – remains close to its highest in decades, at about 5,000 units in April. The company’s backlog of orders is near to its highest in more than two years, according to Bernstein analysts.

How e-commerce with drone delivery is taking flight in China

It is still waiting to earn back its investment in drone-delivery infrastructure, although it says that making a delivery by drone costs a fifth of the price than by man-and-van, once the driver’s labour is taken into account. Liu Qiangdong, JD’s chief executive, says drone delivery will cut costs by 70% once it is scaled up across the country. Villagers tend to buy washing powder, accessories for their phones, maternity goods and fresh food. The firm has made 20,000 such deliveries to date.

JD may have added drones to daily Chinese village life, but whether they will make financial sense for the company over time remains to be seen. Current models of drone are pricey, although JD says the cost will gradually come down as it scales up the network and builds more drones (it plans to sell those it makes to other firms, as well as use them for its operations). The government approves of its operations in rural areas, and is planning to build a new train station in Suqian next to JD’s drone base. If JD can use drone delivery to cut its costs and attract rural shoppers, that will help the firm compete with its arch-rival in e-commerce, Alibaba, which has not, as yet, seen the value of drone delivery. JD hopes that will prove to be a mistake.


Internet lending is booming in China

The balance of online consumer loans in China has grown about fivefold between 2015 and 2017, reaching 350 billion yuan ($54.6 billion), according to Chinese research company Analysys. According to a survey conducted by research specialist Analysys in December 2017, people between the ages of 24 and 35 accounted for more than 70% of consumer borrowers in China.

Chinese consumers, especially people born in 1980 and later, are less squeamish than their older peers about buying on credit. But the total balance of consumer loans in China is still about 60% lower than that in the U.S. and is expected to continue growing. Analysys estimates that the balance of internet loans in China will more than double to 720 billion yuan in 2019, compared with 350 billion yuan in 2017. That flow of credit will likely give a lift to the Chinese consumer market.

The scooter economy

The mistake in Kalanick’s thinking is two-fold: First, up-and-until the point that self-driving cars are widely available — that is, not simply invented, but built-and-deployed at scale — Uber’s drivers are its biggest competitive advantage. Kalanick’s public statements on the matter hardly evinced understanding on this point. Second, bringing self-driving cars to market would entail huge amounts of capital investment. For one, this means it would be unlikely that Google, a company that rushes to reassure investors when it loses tens of basis points in margin, would do so by itself, and for another, whatever companies did make such an investment would be highly incentivized to maximize utilization of said investment as soon as possible. That means plugging into the dominant transportation-as-a-service network, which means partnering with Uber.

My contention is that Uber would have been best-served concentrating all of its resources on its driver-centric model, even as it built relationships with everyone in the self-driving space, positioning itself to be the best route to customers for whoever wins the self-driving technology battle.

Why you should read those boring 10-K filings

The vast majority of the text changes are concentrated in the Management Discussion and Analysis (MD&A) of the 10-K. These disclosures also tend to be more negative than positive, perhaps because the reports are typically drafted by lawyers who tilt toward disclosing negative trends more than positive ones. When the authors applied natural language text processing to evaluate the changes, they found that 86 percent reflected negative sentiment shifts and only 14 percent positive shifts. Furthermore, the text differences contain useful information for predicting future earnings: Changes in the 10-K written text today predict earnings surprises in the future.

Given this negative bias to the textual changes and their ability to predict future earnings, the study shows that companies with 10-K text modifications experience noticeably lower future stock returns than other firms. For example, the authors construct a portfolio that goes long on companies with no material textual changes and shorts firms that contain such changes. That portfolio earns an abnormal positive return of up to 7 percent per year above the market.

Curated Insights 2018.04.08

The most important self-driving car announcement yet

The company’s autonomous vehicles have driven 5 million miles since Alphabet began the program back in 2009. The first million miles took roughly six years. The next million took about a year. The third million took less than eight months. The fourth million took six months. And the fifth million took just under three months. Today, that suggests a rate on the order of 10,000 miles per day. If Waymo hits their marks, they’ll be driving at a rate that’s three orders of magnitude faster in 2020. We’re talking about covering each million miles in hours.

But the qualitative impact will be even bigger. Right now, maybe 10,000 or 20,000 people have ever ridden in a self-driving car, in any context. Far fewer have been in a vehicle that is truly absent a driver. Up to a million people could have that experience every day in 2020.

2020 is not some distant number. It’s hardly even a projection. By laying out this time line yesterday, Waymo is telling the world: Get ready, this is really happening. This is autonomous driving at scale, and not in five years or 10 years or 50 years, but in two years or less.


Facebook, big brother and China

Whether users are OK with this is a personal judgment they make, or at least should be making, when using the services. In open and democratic societies, perhaps users are less worried about what large corporations, who can be secretly compelled to hand over data to the state, know about them. Users are protected by the rule of law, after all. If they are going to see advertising in exchange for content, storage and functionality, then they would rather see relevant than irrelevant advertising alongside their web pages, emails, photos, videos and other files. Most citizens are not criminals and not concerned about what the state knows – they just want to share their holiday photos and chat with each other and in groups via a convenient platform, knowing that Facebook can mine and exploit their data.

But in authoritarian states such as China which control what their citizens can see and which lack a reliable rule of law, such networks pose a bigger threat. Tencent, for example, with its billion active accounts, knows the social graph of China, who your friends and associates are, where you go, what you spend (if you use their payment app) and what you say to each other and in groups on the censored chat platform. Similarly Sina Weibo. The state security apparatus has access to all of this on demand, as well of course as access to data from the mobile phone operators. So even if you stay off the Tencent grid, if you use the phone network then the state will know a lot about anyone you call who is a user of these platforms, as well as being able to profile you based on your repeated common location with other users. All of this data is likely to be accessible to the state in China’s forthcoming Orwellian Social Credit System, a combination of credit rating with mass surveillance. Knowledge is power. No wonder then that China won’t allow Facebook into the game.

Nvidia announces a new chip… But it’s not a GPU

The new chip, NVSwitch, is a communication switch that allows multiple GPUs to work in concert at extremely high speeds. The NVSwitch will enable many GPUs – currently 16 but potentially many more – to work together. The NVSwitch will distance Nvidia from the dozen or so companies developing competing AI (artificial intelligence) chips. While most are focused on their first chips, Nvidia is building out highly scalable AI systems which will be difficult to dislodge.


Nvidia: One analyst thinks it’s decimating rivals in A.I. chips

[Nvidia CEO] Jen-Hsun [Huang] is very clever in that he sets the level of performance that is near impossible for people to keep up with. It’s classic Nvidia — they go to the limits of what they can possibly do in terms of process and systems that integrate memory and clever switch technology and software and they go at a pace that makes it impossible at this stage of the game for anyone to compete.

Everyone has to ask, Where do I need to be in process technology and in performance to be competitive with Nvidia in 2019. And do I have a follow-on product in 2020? That’s tough enough. Add to that the problem of compatibility you will have to have with 10 to 20 frameworks [for machine learning.] The only reason Nvidia has such an advantage is that they made the investment in CUDA [Nvidia’s software tools].

A lot of the announcements at GTC were not about silicon, they were about a platform. It was about things such as taking memory [chips] and putting it on top of Volta [Nvidia’s processor], and adding to that a switch function. They are taking the game to a higher level, and probably hurting some of the system-level guys. Jen-Hsun is making it a bigger game.

Nervana’s first chip didn’t work, they had to go back to the drawing board. It was supposed to go into production one or two quarters ago, and then they [Intel] said, ‘We have decided to just use the Nervana 1 chip for prototyping, and the actual production chip will be a second version.’ People aren’t parsing what that really means. It means it didn’t work! Next year, if Nervana 2 doesn’t happen, they’ll go back and do a Nervana 3.


Apple plans to use its own chips in Macs from 2020, replacing Intel

Apple’s decision to switch away from Intel in PC’s wouldn’t have a major impact on the chipmaker’s earnings because sales to the iPhone maker only constitute a small amount of its total. A bigger concern would be if this represents part of a wider trend of big customers moving to designing their own components, he said.

Apple’s custom processors have been recently manufactured principally by Taiwan Semiconductor Manufacturing Ltd. Its decision may signal confidence that TSMC and other suppliers such as Samsung Electronics Co. have closed the gap on Intel’s manufacturing lead and can produce processors that are just as powerful.

Live Nation rules music ticketing, some say with threats

Ticket prices are at record highs. Service fees are far from reduced. And Ticketmaster, part of the Live Nation empire, still tickets 80 of the top 100 arenas in the country. No other company has more than a handful. No competitor has risen to challenge its pre-eminence. It operates more than 200 venues worldwide. It promoted some 30,000 shows around the world last year and sold 500 million tickets.

Though the price of tickets has soared, that trajectory predates the merger and is driven by many factors, including artists’ reliance on touring income as record sales have plummeted.

Live Nation typically locks up much of the best talent by offering generous advances to artists and giving them a huge percentage of the ticket revenue from the door. Why? Because it can afford to. It has so many other related revenue streams on which to draw: sponsorships for the tour, concessions at venues, and, most of all, ticket fees. The fees supply about half of Live Nation’s earnings, according to company reports.

Critics say enforcement of the consent decree has been complicated by what they call its ambiguous language. Though it forbids Live Nation from forcing a client to buy both its talent and ticketing, the agreement lets the company “bundle” its services “in any combination.” So Live Nation is barred from punishing an arena by, say, steering a star like Drake to appear at a rival stop down the road. But it’s also allowed, under the agreement, to redirect a concert if it can defend the decision as sound business.

Roku’s business is not what you think

That’s far from the only ad inventory Roku has access to. The Roku Channel offers free-to-watch popular movies, which Roku sells ad time against. Many of Roku’s “free” channels are ad supported, with Roku having access to all or some of the ad time on many of those channels (not all of them).

While selling ads is the biggest piece of the company’s Platform business, there are some auxiliary sales as well. See those Netflix, Amazon, Pandora, YouTube, etc. buttons on your Roku remote? The company was paid to put them there. Additionally, some TV brands have licensed the right to include Roku OS right into their television set, another source of revenue.

All told, Platform revenue is 44% of total sales, and growing rapidly. In fact, it more than doubled in 2017, and has increased more than 3-fold over the past 2 years. Even better, Platform revenue carries a gross margin near 75%, meaning that already it makes up 85% of Roku’s gross profitability. Completing the trifecta of good news, Platform sales are far more recurring and reliable in nature than hardware sales, giving the company a firmer footing from which to expand their business. Bottom line here? Roku is not really a commodity hardware maker. It is more of a consumer digital video advertising platform.

There is no shortage of ways to get streaming content. And all of them are fighting tooth-and-nail for users. Google and Amazon practically give away their devices to get users into their ecosystem. Against that lineup, it really has very few competitive advantages. There is no meaningful lock-in to the platform. It is really quite simple and painless for a consumer to switch from a Roku to a competing offering. Getting new customers is even more of a dog fight.

Netflix makes up over 30% of streaming hours through Roku’s platform, but the channel provides essentially no revenue back. Same for Amazon, Hulu, and the most popular ad-supported video network in the world, YouTube. Roku relies on monetizing Roku Channel and other, less prominent content channels. However, there is nothing stopping those other channels from switching to a different ad provider, or (if they are large enough), building out their own.


Alibaba is preparing to invest in Grab

Alibaba leaned heavily on its long-time ally SoftBank — an early backer of Tokopedia and Grab — to get the Tokopedia deal ahead of Tencent. That’s despite Tokopedia’s own founders’ preference for Tencent due to Alibaba’s ownership of Lazada, an e-commerce rival to Tokopedia. SoftBank, however, forced the deal through. “It was literally SoftBank against every other investor,” a separate source with knowledge of negotiations told TechCrunch. Ultimately, Alibaba was successful and it led a $1.1 billion investment in Tokopedia in August which did not include Tencent.

CRISPR recorder

While the Cas9 protein is involved in cutting and correcting DNA, the Cas4 protein is part of the process that creates DNA and genetic memory. CRISPR evolved from a bacterial immune defense system in which bacteria destroy viral invaders. Now we are beginning to understand how bacteria detect the invaders and remember the encounters. With Cas4, bacteria can record these encounters in their DNA, creating a permanent ledger of historical events.

Our understanding of Cas4 is rudimentary, but its potential applications are provocative. Not only will it timestamp key events, but it should be able to monitor how an individual’s body works and how it reacts to different kinds of bacteria. A Cas4 tool should be able to fight antibiotic resistance, an important use case addressing a significant unmet need.

How do wars affect stock prices?

Our research is not alone in reaching this conclusion. A 2013 study of US equity markets found that in the month after the US enters conflict, the Dow Jones has risen, on average, by 4.0 percent—3.2 percent more than the average of all months since 1983. A 2017 study found that volatility also dropped to lower levels immediately following the commencement of hostilities relative to the build-up to conflict. During the four major wars of the last century (World War II, the Korean War, the Vietnam War, and the First Gulf War), for instance, large-cap US equities proved 33 percent less volatile while small-cap stocks proved 26 percent less volatile. Similarly, FTSE All Share and FTSE 100 volatility has historically fallen by 19 and 25 percent over one- and three-month horizons following the outbreak of conflict.

Regression to lumpy returns

Missing a bull can be even more detrimental than taking part in a bear. Following the two huge bear markets we’ve experienced this century, many investors decided it was more important to protect on the downside than take part in the upside. Risk is a two-way street and I’m a huge proponent of risk management, but investors have taken this mindset too far. Missing out on huge bull market gains can set you back years in terms of performance numbers because you basically have to wait for another crash to occur, and then have the fortitude to buy back in at the right time. I have a hard time believing people who missed this bull market because they were sitting in cash will be able to put money to work when the next downturn strikes.


How to talk to people about money

In the last 50 years medical schools subtly shifted teaching away from treating disease and toward treating patients. That meant laying out of the odds of what was likely to work, then letting the patient decide the best path forward. This was partly driven by patient-protection laws, partly by Katz’s influential book, which argued that patients have wildly different views about what’s worth it in medicine, so their beliefs have to be taken into consideration.

There is no “right” treatment plan, even for patients who seem identical in every respect. People have different goals and different tolerance for side effects. So once the patient is fully informed, the only accurate treatment plan is, “Whatever you want to do.” Maximizing for how well they sleep at night, rather than the odds of “winning.”

Everyone giving investing advice – or even just sharing investing opinions – should keep top of mind how emotional money is and how different people are. If the appropriate path of cancer treatments isn’t universal, man, don’t pretend like your bond strategy is appropriate for everyone, even when it aligns with their time horizon and net worth.

The best way to talk to people about money is keeping the phrases, “What do you want to do?” or “Whatever works for you,” loaded and ready to fire. You can explain to other people the history of what works and what hasn’t while acknowledging their preference to sleep well at night over your definition of “winning.”

Curated Insights 2018.03.18

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

An Apple R&D bonanza

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

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


Apple goes from villain to coveted client with this Finnish firm

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

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


Intel fights for its future

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

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


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

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

WhatsApp could shake up digital payments in India

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

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


Amazon turbocharged Audible’s domination of audiobooks

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


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

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

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


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

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

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

Amex to woo retailers with biggest fee cut in 20 years

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

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


SoftBank looks to invade Wall Street’s turf

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


How China’s Huawei killed $117 billion Broadcom deal

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

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

WordPress is now 30 per cent of the web

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

Share buybacks work better in theory than in practice

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

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

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

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

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

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

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

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


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

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

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

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

Pozen Priorities

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


Ironies of luck

If risk is what happens when you make good decisions but end up with a bad outcome, luck is what happens when you make bad or mediocre decisions but end up with a great outcome. They both happen because the world is too complex to allow 100% of your actions dictate 100% of your outcomes. They are mirrored cousins, driven by the same thing: You are one person in a 7 billion player game, and the accidental impact of other people’s actions can be more consequential than your own.

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

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

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

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