Curated Insights 2018.11.23

No more “struggle porn”

I call this “struggle porn”: a masochistic obsession with pushing yourself harder, listening to people tell you to work harder, and broadcasting how hard you’re working.

Struggle porn has normalized sustained failure. It’s made it acceptable to fly to Bali and burn through your life savings trying to launch an Amazon dropshipping business. Made it reasonable to keep living on your parents money for years after graduation while you try to become #instafamous. Made LinkedIn into a depressingly hilarious circlejerk for people who look way too excited to be having their headshot taken.

Working hard is great, but struggle porn has a dangerous side effect: not quitting. When you believe the normal state of affairs is to feel like you’re struggling to make progress, you’ll be less likely to quit something that isn’t going anywhere.

Rule #1 of #StrugglePorn: if someone is bragging about how hard they’re working, you can be sure their business is failing. I don’t know anyone running a multi-million dollar business who follows struggle pornographers like GaryVee. They don’t need the feel-good reassurance that beating their head against the wall is worthwhile. They’re making money, not LinkedIn posts. They’re busy, not struggle busy.


How software is helping big companies dominate

Economies of scale are certainly part of the answer. Software is expensive to build but relatively cheap to distribute; larger companies are better able to afford the up-front expense. But these “supply-side economies of scale” can’t be the only answer or else vendors, who can achieve large economies of scale by selling to the majority of players in the market, would dominate. Network effects, or “demand-side economies of scale,” are another likely culprit. But the fact that the link between software and industry concentration is pervasive outside of the tech industry — where companies are less likely to be harnessing billions of users — suggests network effects are only part of the story.

Research suggests that the benefits of information technology depend in part on management. Well-managed firms get more from their IT investments, and big firms tend to be better managed. There are other “intangible” assets that differentiate leading firms, and which can be difficult or costly to replicate. A senior executive who has worked at a series of leading enterprise software firms recently told one of us (Walter) that a company’s ability to get more from an average developer depended on successfully setting up “the software to make software” — the tools, workflows, and defaults that allow a programmer to plug in to the company’s production system without having to learn an endless number of new skills.

Patents and copyright also make it harder for software innovations to spread to other companies, as do noncompete agreements that keep employees from easily switching jobs. But one of the biggest barriers to diffusion — and therefore one of the biggest sources of competitive advantage for the firms that excel at software — comes down to how companies are organized.

As Dixon, the VC, clearly recognized, these architectural innovations can create openings for startups. “Before [Lyft and Uber] were started, there were multiple startups that tried to build software that would make the taxi and limo industry more efficient,” Dixon has noted. If Uber had merely created software for dispatching taxis, incumbents would have been well positioned to adopt it, according to Henderson’s theory. One “component” of the service would have been changed by technology (dispatching) but not the entire architecture of the service. But ridesharing startups like Uber and Lyft didn’t didn’t just make taxis more efficient; they fundamentally changed the way the different pieces of the system fit together.

Lakhani’s answer is that Apple had the right architecture to bring phones into the internet age. Apple and Nokia both had plenty of the intangible assets necessary to excel in the smartphone business, including software developers, hardware engineers, designers. But Apple’s structure and culture were already based around the combination of hardware and a software ecosystem to which third parties contributed. It already had experience building hardware, operating systems, and software development kits from its PC business. It had built a software platform to deliver content to mobile devices in the form of iTunes. Steve Jobs initially resisted letting developers build apps for the iPhone. But when he eventually gave in, the app store became the iPhone’s key advantage. And Apple was able to manage it because of its existing “architecture.” Like any theory, architectural innovation can’t explain everything. If experience building operating systems and SDKs were so key, why didn’t Microsoft invent the winning smartphone? Apple’s particular acumen in product design clearly mattered, too. But architectural innovation helps explain why certain capabilities are so tough to replicate.

There is some good news: research suggests that cloud computing is helping smaller, newer firms to compete. Also, some firms are unbundling their advanced capabilities. For example, Amazon now offers complete fulfillment services including two-day delivery to sellers, large and small, on its Marketplace. It may be that Carr was right in principle but just had the timing wrong. But we wouldn’t bet on it. Some aspects of software will be democratized, including perhaps some areas where companies now derive competitive advantage. But other opportunities will arise for companies to use software to their advantage. One in particular stands out: even when machine learning software is freely available, the datasets to make it valuable often remain proprietary, as do the models companies create based on them. Policy may be able to help level that playing field. But companies that don’t invest in software and data capabilities risk being left behind.

Disney is spending more on theme parks than it did on Pixar, Marvel and Lucasfilm combined

Disney faces an enviable challenge: Even with steady price increases for peak periods — single-day peak tickets at Disneyland in California now run $135 — visitor interest often exceeds capacity at some properties. “You can only let so many people in a park before you start to impede on satisfaction level,” Mr. Chapek said.

So Disney’s expansion plan is more ambitious than building a “Black Panther” roller coaster here or introducing an “Incredibles” character there. The goal is transformation — adding significant capacity to Disney’s most popular parks (Disneyland, Tokyo DisneySea) and giving others major upgrades (Epcot, Disney Studios Park at Disneyland Paris) to help attract visitors more evenly throughout the empire.

In terms of attracting crowds and creating excitement, nothing quite compares to the “Star Wars” franchise. In 2019, Disney World and Disneyland will open matching 14-acre “lands” called Star Wars: Galaxy’s Edge. On one lavish attraction, guests will board an Imperial Star Destroyer, where roughly 50 animatronic stormtroopers await in formation. On another, guests will be able to pilot an interactive Millennium Falcon.

Even so, Ms. Reif said she was pleased that Disney was spending so heavily on its parks. “It’s the highest return on investment that Disney has,” she said.

Disney Cruise Line will also nearly double in size by 2023. Disney has ordered three new ships costing an analyst-estimated $1.25 billion apiece. It is buying 746 acres on a Bahamian island to build a second Caribbean port. (Disney already has one private island port.)

Rocket Lab’s modest launch is giant leap for small rocket business

Advances in technology and computer chips have enabled smaller satellites to perform the same tasks as their predecessors. And constellations of hundreds or thousands of small satellites, orbiting at lower altitudes that are easier to reach, can mimic the capabilities once possible only from a fixed geosynchronous position.

A Falcon Heavy can lift a payload 300 times heavier than a Rocket Lab Electron, but it costs $90 million compared to the Electron’s $5 million. Whereas SpaceX’s standard Falcon 9 rocket has no shortage of customers, the Heavy has only announced a half-dozen customers for the years to come.


Self-driving cars will be for sex, scientists say

“One of the starting points was that AVs will provide new forms of competition for hotels and restaurants. People will be sleeping in their vehicles, which has implications for roadside hotels. And people may be eating in vehicles that function as restaurant pods,” says Scott Cohen, deputy director of research of the School of Hospitality and Tourism Management at the University of Surrey in the U.K., who led the study. “That led us to think, besides sleeping, what other things will people do in cars when free from the task of driving? And you can see that in the long association of automobiles and sex that’s represented in just about every coming-of-age movie. It’s not a big leap.”

Of the many conclusions the paper drew about the way AVs will reshape urban tourism, perhaps the most surprising was that they’ll also revolutionize red light districts, putting prostitution on wheels. In Amsterdam, the industry (which is far from the regulated sexual utopia it’s often purported to be) was an $800 million business in 2011.

Is there a new debt crisis on the horizon?

Historically, the cycle of interest rate hikes by the Federal Reserve has been a key factor in the pricing and volatility of relatively risky and illiquid assets, such as fixed income securities issued and traded in emerging markets. If anything, recent turmoil in the global debt, equity and currency markets once again questions the viability and sustainability of the economic growth in some emerging economies and emerging financial markets.

If history can be a useful benchmark, three types of risks may emerge in emerging economies in response to interest rate hikes: 1. Capital flight; 2. Asset price fluctuation; 3. Currency devaluation.

Three charts that explain boom in Southeast Asia’s net economy

The region’s ride-hailing market will expand to about $7.7 billion in 2018 and is expected to reach $28 billion by 2025, underscoring the ambition of Go-Jek and Grab to become Southeast Asia’s super apps. Google and Temasek began including online food delivery in this category for the first time this year, given the growing importance of that business.

Online travel is the largest and most established among the four sectors of the internet economy, accounting for about $30 billion in bookings in 2018. About 41 percent of all travel bookings made in Southeast Asia were completed online, up from 34 percent in 2015. By 2025, 57 percent of the bookings will be made online when the market is projected to reach $78 billion.

Online shopping has been the fastest growing sector of the internet economy, reaching $23 billion in 2018. It’s expected to exceed $100 billion by 2025.

Box CEO Aaron Levie thinks big companies are responding to disruption the wrong way

But the root of where that innovation comes from, whether it’s Netflix, Amazon, Lyft, or Airbnb, is that these businesses are run completely differently than the incumbents. A lot of incumbents attempt to either buy, acquire, or partner with those disrupters, but that’s not going to get to the root of actually solving the problem over the long run, which is that your company has to fundamentally run in a different way in the digital age.

That’s the fundamental difference between how most people are responding to disruption and how you realistically need to in the digital age. Yes, the business model is important. Yes, the consumer experience is incredibly important. But the sustainable way to make sure you’re always able to keep up with that is by looking at your organization and your operations. That’s the thing that most companies tend to miss.


Why it’s easier to make decisions for someone else

We should also work to distance ourselves from our own problems by adopting a fly-on-the-wall perspective. In this mindset, we can act as our own advisors—indeed, it may even be effective to refer to yourself in the third-person when considering an important decision as though you’re addressing someone else. Instead of asking yourself, “what should I do?” ask yourself “what should you do?”.

Another distancing technique is to pretend that your decision is someone else’s and visualize it from his or her perspective. This can be very easy when thinking of famous exemplars, such as how Steve Jobs would make your decision. By imagining how someone else would tackle your problem, people may unwittingly help themselves.

Perhaps the easiest solution is to let others make our decisions for us. By outsourcing our choices, we can take advantage of a growing market of firms and apps that make it increasingly easier for people to “pitch” their decisions to others. For example, people can have their clothes, food, books, or home decor options chosen for them by others.

The unfair advantage of discomfort

The most uncrowded path to profound wealth is often subtle improvements in an existing industry so beautifully boring as to not attract attention from those attempting to sharpen a unicorn horn instead.

Curated Insights 2018.10.26

A change in perspective

Which one of these investments would you want for the next 20 years? Mathematically you should be indifferent, but behaviorally you won’t be.

If you are aged 25-44, asset C will be cheap while you are still in the wealth accumulation stage of your life. This is why Josh Brown says millennials should be stoked for a market crash, and he is right. However, since we don’t know the future, it would be near impossible to stay with asset C while assets A and B also exist. Once again, the deciding factor is perspective.

This is why you should never forget the impact of your perspective, and the perspectives of others, when making investment decisions. You have to consider someone else’s investment umwelt before you make any important financial choices. When you see friends rushing into the hottest asset class, consider what their goals are. When you hear about a new stock tip from a broker, think about why they would be telling you that. When you feel the panic set in as everyone around you is selling, remind yourself of your long term financial plan.

Can the stock market predict the next recession?

By my calculations, the S&P 500 has had 20 bear markets (down 20% or worse) and 27 corrections (down 10% but less than 20%) since 1928. The average losses saw stocks fall 24% and lasted 228 days from peak-to-trough. Of those 47 double-digit sell-offs, 31 of them occurred outside of a recession and didn’t happen in the lead up to a recession. That means around 66% of the time, the market has experienced a double-digit drawdown with no recession as the main cause. Of those 31 which occurred outside of a recession, the losses were -18% over 154 days, on average.

We’ll have a recession at some point but odds are the stock market won’t tip us off ahead of time. In fact, most of the time people don’t even realize we’re in a recession until after it’s already begun. NBER typically gives the official word for a recession around the time they’re ending or already in the midst of a slowdown. The recession that began in March 2001 wasn’t officially called a recession by NBER until November 2001, the month it ended. The recession that began in the summer of 1990 wasn’t determined until the spring of 1991. And the recession that began in the summer of 1981 wasn’t called a recession until January of 1982.

21 lessons from Jeff Bezos’ annual letters to shareholders

2017: Build high standards into company culture
2016: Move fast and focus on outcomes
2015: Don’t deliberate over easily reversible decisions
2014: Bet on ideas that have unlimited upside
2013: Decentralize decision-making to generate innovation
2012: Surprise and delight your customers to build long-term trust
2011: Self-service platforms unlock innovation
2010: R&D should pervade every department
2009: Focus on inputs — the outputs will take care of themselves
2008: Work backwards from customer needs to know what to build next
2007: Missionaries build better products
2006: Nurture your seedlings to build big lines of business
2005: Don’t get fixated on short-term numbers
2004: Free cash flow enables more innovation
2003: Long-term thinking is rooted in ownership
2002: Build your business on your fixed costs
2001: Measure your company by your free cash flow
2000: In lean times, build a cash moat
1999: Build on top of infrastructure that’s improving on its own
1998: Stay terrified of your customers
1997: Bring on shareholders who align with your values
Links to Jeff Bezos’s Shareholder Letters (1997-2017)

The quality of quantity at Netflix

Calculating the customer acquisition cost for Netflix is easy — take the segmented marketing costs (handily provided by the company), and divide by the number of paid subscribers added.

The lifetime value of a Netflix subscriber. To work this out: 1. take the average revenue of a user in the quarter; 2. multiply it by the gross margin (to figure out how profitable a subscriber is), then
3. divide this figure by the churn rate — the proportion of customers which leave each quarter.

On to stage 2 of our calculation: the profitability per user. So that’s the numbers above, multiplied by the gross margin (revenues, minus the cost of providing the service).

Lower gross margins in the future due to higher content costs might effect the lifetime value assessment, but lets stick with existing numbers for now. So we’ve got the first two parts of our customer lifetime value calculation, leaving just the churn rate.

But that isn’t really what we’re after, what we want to know is the ratio between how much money a paid subscriber is worth — the lifetime value — and how much it costs Netflix to pull one in to its platform — the customer acquisition cost.

Tesla short seller warns of ‘massive’ supply-chain disruption

“We question the ability for Tesla to actually deliver on their promises to their customers when they’re on the brink of potentially a massive supply-chain disruption,” Quadir said in an interview on Bloomberg Television. “We see very little contingency planning, and we also see executives from the supply chain department departing in recent weeks and months.’’


Trupanion stock sinks after report of state probe

Part of the short thesis on Trupanion is based on the idea that vet activity may not comply with some state insurance regulations. It represents a bigger risk than consumer complaint investigations, which are commonplace for insurers. If regulatory challenges continue it could further dent investor sentiment about the shares.

Serverless computing’s innovative approach to software development

“By purchasing more cloud computing capacity then they really need – even as a deliberate strategy to safeguard against crashing key systems – or buying advanced reserves that they will never use, companies across all industries may be overspending on cloud services by an average of 42%, according to data compiled by Densify, a cloud optimization firm that works with big companies worldwide. That can translate into hundreds of thousands or even millions of lost dollars in IT budgets a year, depending on the size of cloud deployments, the firm said. Its estimates are based on input from 200 cloud-industry professionals and 70 global companies over the last year.”

Serverless is based on a very different resource management model. The biggest overhead is in the design of the application. Serverless applications are woven or composed from a collection of loosely coupled, lightweight modules or microservices. Each such module is only given resources when triggered by another application module or invoked by an external function. Serverless modules are expected to run for a relatively short time, and are generally limited in how long each invocation is allowed to run. Once the module finishes running, its resources are returned to the serverless platform and made available to other modules that need them. The modules are stateless, meaning that no information is carried over or remembered between invocations. Any information that needs to be persistent across invocations must be explicitly stored in a separate file or data base.

Given the special nature of serverless applications, developers no longer need to plan, allocate or provision module instances. Once a module is invoked, the serverless platform will figure out the resources it requires and automatically provision them. As other modules are invoked, the platform will automatically allocate the required resources, and take them away once they’ve finished running. Developers are only charged for the resources used during the time their modules actually run. If invoked infrequently, or if invocations are spiky, there’s no need to plan for and pay for just-in-case-resources.


Now apps can track you even after you uninstall them

Uninstall tracking exploits a core element of Apple Inc.’s and Google’s mobile operating systems: push notifications. Developers have always been able to use so-called silent push notifications to ping installed apps at regular intervals without alerting the user—to refresh an inbox or social media feed while the app is running in the background, for example. But if the app doesn’t ping the developer back, the app is logged as uninstalled, and the uninstall tracking tools add those changes to the file associated with the given mobile device’s unique advertising ID, details that make it easy to identify just who’s holding the phone and advertise the app to them wherever they go.

Curated Insights 2018.08.17

Not enough people are paying attention to this economic trend

Haskel and Westlake outline four reasons why intangible investment behaves differently:

  • It’s a sunk cost. If your investment doesn’t pan out, you don’t have physical assets like machinery that you can sell off to recoup some of your money.
  • It tends to create spillovers that can be taken advantage of by rival companies. Uber’s biggest strength is its network of drivers, but it’s not uncommon to meet an Uber driver who also picks up rides for Lyft.
  • It’s more scalable than a physical asset. After the initial expense of the first unit, products can be replicated ad infinitum for next to nothing.
  • It’s more likely to have valuable synergies with other intangible assets. Haskel and Westlake use the iPod as an example: it combined Apple’s MP3 protocol, miniaturized hard disk design, design skills, and licensing agreements with record labels.

For example, the tools many countries use to measure intangible assets are behind the times, so they’re getting an incomplete picture of the economy. The U.S. didn’t include software in GDP calculations until 1999. Even today, GDP doesn’t count investment in things like market research, branding, and training—intangible assets that companies are spending huge amounts of money on.


How Box conquered the enterprise and became a $1.7 billion company in a decade

However, what most people failed to understand—and continue to misunderstand to this day—is that Dropbox was never launched as a competitor to Box. The use cases were completely different. Box.net and Dropbox may have shared some similar underlying technologies (and an uncomfortably similar name), but the focus of Dropbox was cloud-based file management for the consumer market. Box was focused on file sharing. By the time Dropbox launched in 2007, Box.net had already largely abandoned the consumer market in favor of the enterprise. There were other key differences between the two products, such as the necessity of installing a dedicated Dropbox directory on a user’s local machine versus Box.net’s entirely cloud-based interface. Additionally, the two companies’ target markets and business models couldn’t have been more different.

Levie knew SharePoint was Box’s biggest competitor, so he did what any inventive, irreverent entrepreneur would do—he took out a billboard advertisement on a stretch of highway on Route 101 between San Francisco and Silicon Valley. The ad promised SharePoint users that Box would pay for three months of SharePoint access if they didn’t prefer Box. In February 2009, Box went one step further in its media assault on Microsoft by erecting another billboard, this one highlighting the many aspects of SharePoint that were most unpopular among its user base.

While the enterprise market represented a unique chance for Box to pivot away from the increasingly competitive consumer market, essentially shifting the focus of the entire company was no small undertaking. Until that point, Box had used a freemium business model. This worked fine for the consumer market, but it was completely unsuitable for the enterprise. This meant Box would not only have to radically redesign its product from the ground up but also restructure its entire business model.

By acquiring Increo, Box immediately gained access to Increo’s innovative document collaboration tools. This was crucial. It wasn’t enough for Box to offer cloud-based storage or integrations with Salesforce and Office. It had to offer additional value as competing tools vied for dominance.

The consumerization of enterprise IT driven by Box and other forward-thinking companies wasn’t merely an attempt to cultivate a unique value proposition or drive adoption. It reflected much broader shifts in computing in general. The advent of Web 2.0 apps created a new design paradigm that placed emphasis on ease of use and accessibility across multiple devices over complex file management tools. Smartphones fundamentally changed the way we think of computing. For an enterprise software company like Box to be at the forefront of trends in usability was impressive.

OneCloud was an excellent example of how consumer-focused design informed Box’s broader strategy. The company had built a platform for developers in 2011 known as the Box Innovation Network, which functioned similarly to an app marketplace. OneCloud was an extension of this idea, only it was intended exclusively for mobile devices. This would later become a predictable cycle in Box’s development. New features were added to the product to meet emerging needs, and those features were presented to users in ways that directly mirrored those of consumer apps and sites.

What’s more important, however, is how well Box converted its free users to paid subscribers. Consumer apps like Evernote convert free users to paid plans at a rate of approximately 3%. Box was converting free users to paid plans at a rate closer to 8%, including major corporate customers such as Bank of New York and ambient advertising powerhouse Clear Channel. As a result, Box achieved revenues of more than $11M in 2011.

Because most of Box’s sales calls came from companies that had already been using the product, Box’s sales teams were typically able to close 60% of those deals within two weeks—an impressive figure, especially considering the often months-long sales cycles typically associated with the enterprise market.

Box has done an excellent job of not only carving out its own niche in an increasingly competitive space but also by applying design and UX principles of consumer-focused SaaS products to redefine how enterprise software looks, feels, and works. With its keen focus on usability, ease, and simplicity, Box has become a leading force in the consumerization of the enterprise and has shaped how other enterprise software companies approach their products.

Ad tech firm poised to surge 50%

Bid factoring is essentially a linear equation that enables marketers to apply multipliers to different targeting parameters. This approach makes it easier to value each user individually and dynamically, allowing marketers to more easily reach their target users. Bid factoring saved time for marketers through automation and removed the need to store tons of line item permutations, therefore lowering data storage costs.

When Green started The Trade Desk, his goal was to “build a company for the next 100 years.” He did not want to follow the same mistakes that other companies in the space made such as having a conflict of interest by being on both the buy and sell side. Green decided to build a demand side platform because he believed the demand side of the advertising transaction will always have the advantage. In advertising it will always be a buyer’s market because it is easy to add supply by having an extra impression on a web page or additional 30-second spot to a commercial break to meet increased demand. This basic economic reality means advertising supply is more elastic than demand and will forever put the buy side in the power position.

The Trade Desk would also be transparent and not charge unsustainable take rates. Green believed once the digital advertising industry matures, total transaction costs to purchase a digital ad would be $0.20-$0.30 for every $1.00 spent, with roughly $0.15-$0.20 going to the DSP and $0.05-$0.10 being split between the SSP and the ad exchange. The Trade Desk could have charged much higher take rates but decided to charge customers what it believed would be the fair end-state price for their services. While take rates could become lower as competition potentially increases, similar to what happened with discount stock brokerages, barriers to entry and the DSP’s ability to provide increasing value to advertisers overtime should preserve prices.

As the ad market has grown, the number of auctions has increased exponentially. In order for a DSP to win an auction, it now takes many more looks. For each ad campaign, costs have increased while revenues remained fairly flat, increasing operating leverage. DSPs that have half the ad spend as The Trade Desk will struggle because they will incur the same amount of expense per ad campaign but monetize less, making it much more difficult to be profitable if you are a smaller player and don’t have the scale.

Every day The Trade Desk’s customers log into their platform to use the data and analysis to value ad inventory and run marketing campaigns. Advertisers provide their customer data and publishers provide their user data, which The Trade Desk uses to help advertisers value media for their specific needs. As The Trade Desk accumulates more data over time, its insight and analysis add more value to its customers, creating a self-reinforcing virtuous cycle.


Nvidia’s new Turing architecture is all about real-time ray tracing and AI

Nvidia describes the new Turing architecture as “the greatest leap since the invention of the CUDA GPU in 2006.”

“Hybrid rendering will change the industry, opening up amazing possibilities that enhance our lives with more beautiful designs, richer entertainment and more interactive experiences,” said Nvidia CEO Jensen Huang. “The arrival of real-time ray tracing is the Holy Grail of our industry.”

The new RT cores can accelerate ray tracing by up to 25 times compared to Nvidia’s Pascal architecture, and Nvidia claims 10 GigaRays a second for the maximum performance.

With NGX, Nvidia today also launched a new platform that aims to bring AI into the graphics pipelines. “NGX technology brings capabilities such as taking a standard camera feed and creating super slow motion like you’d get from a $100,000+ specialized camera,” the company explains, and also notes that filmmakers could use this technology to easily remove wires from photographs or replace missing pixels with the right background.


Tesla’s autonomous opportunity is severely underappreciated

We estimate that net revenue for autonomous platform providers – those companies that own the software technology stack for autonomous ride-hailing services – should exceed $2 trillion by 2030, roughly equal to our expectations for automaker revenue at that time. Unlike their auto-manufacturing peers, however, autonomous platform providers should see software-like margins, be less capital-intensive, and enjoy network-effect-driven regional competitive dominance. So, while autonomous platform providers may generate the same revenue as automotive manufacturers, ARK believes these providers will generate six times the operating earnings and consequently will prove to be substantially more valuable. In fact, ARK estimates autonomous platforms will be worth more than the entire $4 trillion global energy sector.

An enhanced Autopilot package with the ability to self-drive costs $5,000 upfront or $6,000 for customers who choose to wait and buy later. Payment for this feature alone can be thought of as nearly pure profit on every Tesla sold. In addition, once Tesla launches the Tesla Network, its autonomous ride-hailing network, it could collect platform fees, similar to Uber’s model today, from every autonomous ride charged to the consumer. Given a rate of $1 per mile to the end consumer and over 100,000 miles per year per vehicle, Tesla could benefit from $20,000 in high-margin platform fees per car per year. Over a five-year lifetime, a single Model 3 could generate $40,000 in net cash flow. Even investors optimistic about Tesla’s prospects project the Model 3 cash flow at $4,000 and one-time in nature. In effect, each Model 3 sale could generate 10 times more cash flow than investors currently understand.

Google’s targeted ads are coming to a billboard near you

Digital outdoor ad spending is growing at 15 percent annually, and will overtake traditional outdoor outlays by 2020, according to PwC. But Google is the 800-pound gorilla that’s not yet in the room. It would give the company another major edge over Facebook, which doesn’t have the same access to location-based mobile data.


Alibaba tweaks a controversial legal structure

There are three problems with VIEs. First, key-man risk. If the people with nominal title die, divorce or disappear, it is not certain that their heirs and successors can be bound to follow the same contracts. Second, it is not clear if the structure is even legal. China’s courts have set few reliable precedents on VIEs and the official position is one of toleration rather than approval. Third, VIEs allow China’s leading tech firms to be listed abroad, preventing mainlanders from easily owning their shares and participating in their success.

Alibaba’s proposed change is aimed at tackling the first problem, key-man risk. At the moment four of its five VIEs are nominally owned by Jack Ma, the firm’s leader, and Simon Xie, a co-founder and former employee. After the restructuring, the two men will no longer be the dominant counterparties. Instead the VIEs will be owned by two layers of holding companies, which will sign contracts with Alibaba. These holding companies will ultimately be nominally owned by a broader group of Alibaba’s senior Chinese staff. The idea is that if anyone gets run over by a bus, then the scheme will not be disrupted, because nominal control is spread among a wider group of people. The new approach is far from perfect but it is an improvement. If all goes to plan it will be completed by 2019. Other tech firms may feel pressure to follow.

$1b+ market map: The world’s 260 unicorn companies in one infographic
60+ startups disrupting IKEA in one market map

SoftBank’s Son says WeWork is his ‘next Alibaba’

It is rare for Son, who casts a wide net with his startup investments, to commit so much resources to a single company. But he said WeWork is more than just a renter of office space: it is “something completely new that uses technology to build and network communities.”

The use of shared space to forge connections is not unique to WeWork. The company’s edge lies in the steady flow of data it collects on members, which is shared with other locations and can be accessed by users of the WeWork app around the world. The idea is that more data means more innovation — a model that underlies Son’s excitement about the company.

What MoviePass can teach us about the future of subscription businesses

Pricing is so powerful that playing with it requires great skill and precision. MoviePass should have done its price experimentation at the outset and on a local basis. It could have optimized the price points and tested alternative pricing models quietly, instead of jerking millions of customers around. Even a slight tweak — such as moving to a club pricing model like Costco’s — might have solved its cash-flow problems.

These kinds of tweaks could also have enabled the company to consider regional pricing strategies, given that its cost of goods (the full price of movie tickets, which it pays theater operators) varies from $8 in Nebraska to over $15 in New York. This case is also a good reminder that the United States has local profit pools. It is silly to think that a one-size-fits-all national strategy is the right approach for a market as ethnically and economically diverse as the United States.

MoviePass failed to recognize how the behavior of superconsumers, customers who are highly engaged with a category and a brand, differs from that of average consumers — and how, if not anticipated, this difference can create problems for a company’s cost model. It can especially be a problem if the company uses a “buffet” model of fixed price and unlimited quantities, as MoviePass did.

Quantum computers today aren’t very useful. That could change

Quantum computers are, however, far more prone to errors than binary machines. Instead of using electric signals to generate a series of zeros and ones like a conventional computer, quantum computers rely on the real-world, mechanical behavior of photons, which are packets of microwave energy. The machines require a complex, multi-layered refrigeration process that brings quantum chips to a temperature just above absolute zero. By eliminating certain particles and other potential interference, the remaining photons are used to solve computational problems. The true magic of this system is how photons can become entangled and produce different but related results. Scientists only partially understand why it works the way it does.

A quantum chip doesn’t look like much with the naked eye. Through an optical microscope, though, you can see the quantum logic gate that makes everything possible. The team here is working on a process of stringing together 16-qubit chips to execute on the 128-qubit design. Essential to this is a new kind of quantum chip that communicates results in three dimensions instead of the current two, which allows Rigetti to fit the chips together like puzzle pieces and turn them into a single, more powerful computer. “What we’re working on next is something that can be scaled and tiled indefinitely,” Bestwick said.

Why the future belongs to ‘challenge-driven leaders’

The consensus view of Mr. Marchionne, relayed by hundreds of tributes, is that he possessed an unusual blend of vision, technical expertise, analytical rigor, open-mindedness and candor. The remembrances also agreed on something else: he was a bona fide eccentric. “God bless you, Sergio,” Morgan Stanley analyst Adam Jonas told Mr. Marchionne during a January conference call. “We’re never going to see anyone like you again.”

The trajectory of great ideas

“Being right is the enemy of staying right because it leads you to forget the way the world works.” – Jason Zweig. Buddhism has a concept called beginner’s mind, which is an active openness to trying new things and studying new ideas, unburdened by past preconceptions, like a beginner would. Knowing you have a competitive advantage is often the enemy of beginner’s mind, because doing well reduces the incentive to explore other ideas, especially when those ideas conflict with your proven strategy. Which is dangerous. Being locked into a single view is fatal in an economy where reversion to the mean and competition constantly dismantles old strategies.

Survivorship bias on wheels

One last thing: When it was introduced as new in 1984, the 1985 Testarossa listed for $90,000 (but dealers charged huge premiums over list due to “Ferrari fever.”) You can still find Testarossas for that original list price — meaning the net returns over 43 years has been precisely zero — before maintenance, storage and repair costs.

As a comparison, in 1985, the benchmark S&P500 was about 200, and it closed yesterday at 2,821.93. That generated an average annual return of about 8.5%, returning 1,400% price appreciation since then, and, with dividends reinvested, over 3,000% total return (in nominal terms, like the chart above, neither is adjusted for inflation).

Selecting investments after the fact is easy; ask yourself this question: What car do you want to buy as an investment for the next 34 years to be sold in 2052?


Curated Insights 2018.03.11

Warren Buffett is even better than you think

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

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

How Amazon can blow up asset management

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

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


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

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

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

Why Spotify won’t be the Netflix of music

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

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

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

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

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


Analysing software businesses

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

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

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

‘Success’ on YouTube still means a life of poverty

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

Ideas that changed my life

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

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