Curated Insights 2019.11.01

GrubHub shareholder letter (October 2019)

A common fallacy in this business is that an avalanche of volume, food or otherwise, will drive logistics costs down materially. Bottom line is that you need to pay someone enough money to drive to the restaurant, pick up food and drive it to a diner. That takes time and drivers need to be appropriately paid for their time or they will find another opportunity. At some point, delivery drones and robots may reduce the cost of fulfillment, but it will be a long time before the capital costs and ongoing operating expenses are less than the cost of paying someone for 30-45 minutes of their time. Delivery/logistics is valuable to us because it increases potential restaurant inventory and order volume, not because it improves per order economics.

Earlier, we talked about the great progress we are making with enterprise brands. We love working with large enterprise brands because they help drive new diners to our platform and keep diners from going to other platforms. That said, the biggest enterprise brands don’t need Grubhub to bring them new diners in the same way independents and small chains do because they spend billions a year on developing their own brands. What they need most is a driver to take the food to their diners. And, as we just noted, that isn’t cheap, or particularly scalable, so the unit economics and long term profit outlook for our business would look very different if a majority of our business was coming from large enterprise brands.

Life of pie: A closer look at the Domino’s Pizza system

The key to operating a successful Domino’s master franchise is to have the Domino’s brand stand out against all the other pizza options that are available in the marketplace. In other words, the brand has to be put to work to generate demand, which can only be achieved with significant marketing spend. Tv is still quite important for Domino’s and generally requires a significant advertising budget. That budget has to be levered on a good number of restaurants in order to make sure the marketing expenses stay at a reasonable level per store.

Every new market that’s entered starts more or less from scratch, with limited consumer awareness and entrenched behavior that benefits the incumbents. This is why it is so difficult for a new Domino’s market to get to a scale that makes economic sense. Once you manage to reach that scale that the flywheel can start spinning, because at that point the business can self-generate its growth through reinvestment in marketing.

It appears that the entire Domino’s franchise has come under a bit of pressure from aggregators like Takeaway, Uber Eats, Grubhub and Doordash, which are oftentimes operating at a loss. Since the aggregators are providing access to technology platforms that many small operators would not be able to afford or operate on their own, they’ve essentially levelled the playing field for pizza restaurants again. In my opinion this has decreased Domino’s Pizza’s advantage in the mobile ordering space. Domino’s Pizza Inc.’s CEO conceded recently that the aggregators are indeed having an effect on their same store sales growth (item below). For now I have no strong conviction on Domino’s but it is a business with some fascinating developments.

Schwab kills commissions to feed its flywheel of scale

“ we did not expect such a swift reaction in the sense that we thought that we come out with IBKR Lite as an additional offering and that we go on for a while, and will attract some customers and then eventually, other people will start reducing and maybe all go to zero. So this — this very swift reaction was a surprise to us.” – Thomas Peterffy, Founder and Chairman, Interactive Brokers Group (IBKR), 3Q 2019 Earnings Call

We believe Schwab’s business stands to benefit the most because of the relatively small impact to its revenue and income and the broad, efficient set of high quality service it offers to clients. While the commission cuts mean Schwab offers an even more compelling value to its customers for its existing suite of high quality services, a disadvantaged competitor like TD Ameritrade is trying to figure out how to charge for its “premium” services for customers, effectively raising prices for service in other ways and depressing its value proposition.

Decades of experience indicates the companies offering higher value propositions win more customers. By continuing to pursue aggressive reinvestment in both client service and technological efficiency, Schwab can continue to leverage its growing scale to further improve upon the value proposition it provides clients while continuing to drive down its expense (efficiency) ratio. We believe the gap in differentiation will only get wider now that the smaller competitors are much weakened financially, which is why it made sense for Schwab to be so aggressive in cutting commissions both in 2017 and again October 2019.

An Elastic technical review

Elastic isn’t building a cloud side and a on-prem side to their platform like MDB is. It’s all Elastic Stack in the Elastic Cloud, just hosted at whatever cloud provider the customer desires, and managed by the finest experts one could find — thems that wrote it! There isn’t tooling appearing in Elastic Cloud that isn’t in core platform, unlike MDB with their Stitch serverless platform. However, the downside is that their Elastic Stack releases must bundle the proprietary modules side-by-side with the open-source products.

One striking difference as I walked through the product line, is the number of use cases it solves that DO NOT INVOLVE CODE. MDB is for developers only, to embed into their application stack. Elastic is for that, but also for non-developers to use without needing any custom development. IT can hook up Beats for monitoring infrastructure or network traffic. Enterprise users can feed in datasets with Logstash, for staff to query, visualize, or apply ML in Kibana. I expect this trend to continue, as it really opens up the applicability as to who can use the product line.

Best of all, Elastic is making exciting moves that are moving their company beyond being a do-it-yourself tool provider.


Third Point’s Q3 letter: EssilorLuxottica thesis

Our analysis of potential merger synergies points to over €1 billion in additional profit through efficiencies and revenue growth, almost double the Company’s current targets. In the near‐term, this will be driven by cross‐selling to wholesale customers, insourcing lens procurement, and supply chain efficiencies. The longer‐term opportunity to disrupt the industry value chain is even more appealing: combining lens and frame to shrink raw material need and waste, reducing shipping costs by merging prescription labs with global distribution hubs, and providing a true omni‐channel sales offering. These initiatives will transform the way glasses are sold, significantly improving the customer experience.


Ensemble Capital client call transcript: Mastercard update

While you might hear about how merchants pay 2% or more in credit card fees, Visa and Mastercard are only collecting about 1/20th of that fee, with the banks, the ones taking the credit risk, earning the bulk of the fee.


Ensemble Capital client call transcript: Tiffany & Co update

Tiffany is one of just a few global American luxury brands and the casual observer cannot tell a Tiffany diamond engagement ring from one purchased elsewhere. There’s no room on a diamond for logo placement, after all.

As a company, Tiffany is older than Cartier (founded in 1847), Louis Vuitton (founded in 1854), and Burberry (founded in 1856). This durability matters in luxury because it communicates a brand’s ability to endure all kinds of major socioeconomic changes and remain relevant over successive generations. It also communicates a certain timelessness of core products that remain in fashion despite intermittent fads and trends.

The advertising industry has a problem: People hate ads

“It’s harder to reach audiences, the cost of marketing is going up, the number of channels has exponentially proliferated and the cost to cover all of those channels has proliferated,” Jay Pattisall, the lead author of the report, said in an interview. “It’s a continual pressure for marketers — we’re no longer just creating advertising campaigns three or four times a year and running them across a few networks and print.”

That includes automation and machine learning technologies, which Forrester expects will transform 80 percent of agency jobs by 2030. In July, JPMorgan Chase announced a deal with the ad tech company Persado that would use artificial intelligence to write marketing copy.

Steven Moy, the chief executive of the Barbarian agency, said that multiyear contracts had shortened, with budgets tightening and performance metrics becoming more stringent.

For the first time ever next year, Facebook, Google, YouTube and other online platforms are expected to soak up the majority of advertising dollars, according to WARC.

Last year, 78 percent of members of the Association of National Advertisers had an in-house agency, up from 58 percent in 2013 and 42 percent in 2008.

Curated Insights 2019.07.19

Disneyland makes surveillance palatable—and profitable

Despite these familial concerns, Disney’s data mining never faced the sort of scrutiny that Silicon Valley has. The reason is fairly simple: Disney World is the real-world manifestation of a walled garden, a family-friendly environment without a perceived risk of children being exposed to inappropriate content like on YouTube or Twitch. Wired once called this data-driven customer relationship “exactly the type of thing Apple, Facebook and Google are trying to build. Except Disney World isn’t just an app or a phone—it’s both, wrapped in an idealized vision of life that’s as safely self-contained as a snow globe.”


Ray-Ban owner in talks for GrandVision at $8 billion value

By adding GrandVision, which sells prescription glasses, contact lenses and other eyecare products, EssilorLuxottica would gain more than 7,000 stores in more than 40 countries. GrandVision operates under retail brands including Brilleland and For Eyes. In addition to its well-known sunglass labels, including Oakley, EssilorLuxottica owns store chains like LensCrafters and Pearle Vision.

EssilorLuxottica’s interest in GrandVision comes only two months after the company defused a leadership dispute that weighed on its shares. The eyecare maker, the result of a merger of France’s Essilor and Italy’s Luxottica, said in May that it would seek a new chief executive officer — an effort to find a compromise between Chairman Leonardo Del Vecchio and Vice Chairman Hubert Sagnieres. The dispute flared up after the companies sealed their $53 billion merger last year, with Del Vecchio saying he wanted to appoint his deputy as CEO and Sagnieres countering that the Italian was making false statements in an effort to seize control of the group.


Shopify and the power of platforms

This is how Shopify can both in the long run be the biggest competitor to Amazon even as it is a company that Amazon can’t compete with: Amazon is pursuing customers and bringing suppliers and merchants onto its platform on its own terms; Shopify is giving merchants an opportunity to differentiate themselves while bearing no risk if they fail.

Curated Insights 2019.05.17

Uber's biggest underestimation would be thinking its competition was just the taxi and limousine market in the U.S., a $4.2 billion opportunity. That turned out to be way too small. Instead, Uber's revised total addressable market is all vehicle and public transport trips, according to its S-1 filing. That's now a $5.7 trillion market size.

The investor who turned down Uber at a $5m valuation

In its 2010 seed round, Uber raised $1.6m according to Pitchbook, giving it a $5.4m valuation. On Friday, it closed its first day of trading publicly with a valuation of around $70bn. That was significantly below the $100bn valuation the company had recently hoped to achieve, but it still meant early investors were able to cash in on huge returns.

But he was wary. Having lived in London for many years previously, he said he knew how strong the taxi lobbies were. In Los Angeles, he knew that everyone had their own cars and never took cabs. This was clearly going to be a niche, local service for certain cities only, he thought. 

WeWork wants to become its own landlord with latest spending spree

Neumann took control of 65 percent of WeWork’s voting equity as part of a 2014 funding deal—while celebrating, he partied so hard he broke a floor-to-ceiling window in his office, according to a person familiar with the incident—and since then, he’s been known to make company-level decisions on what look, from the outside, like whims. When WeWork sold bonds for the first time a year ago, it originally planned to sell $500 million worth, but the final number was $702 million, because 702 was deemed a lucky number, a source familiar with the matter says. Neumann referred a question on the number to his general counsel, who declined to comment. It’s unclear what strategic value WeWork’s investment in an indoor wave pool company offered, but Neumann does love to surf.

Curated Insights 2019.04.19

Making uncommon knowledge common

Part of the reason was that companies benefited from this credibility through obscurity. Real estate brokers have access to significantly more data about the specific houses and the general market via a set of data sources called the MLS. Historically, only brokers had access to MLS data, which gave them leverage over their customers and entrenched their importance as market makers. Similarly, lack of visibility into companies allowed bad ones to put on a good face until prospective employees had already joined. And only large companies could pay for data from compensation research providers, giving them advantage over the potential hires they negotiated with. Many incumbents are able to intermediate their markets and unfairly gain an edge from people’s lack of knowledge. And it’s scary to be the first to buck this trend on your own.

Before Zillow and Glassdoor, if you wanted to look up information about a specific home or company, there wasn’t a webpage for it. Barton’s companies created the definitive page for each house and company. Using a combination of data from authoritative sources (like all the various MLS systems) and user-generated data, they created high quality content unique to each company or listing. Being among the first to do this let them do a huge SEO land grab, which has been hard to displace since.

Barton’s companies take industries that are low frequency and use their Data Content Loops and SEO to acquire users for free and engage them more frequently. While most companies in real estate have super high customer acquisition costs, Zillow is able to get potential sellers even before they are ready to sell, so Zillow is already there when the sellers are ready.

Owning demand ultimately becomes its own compounding loop since becoming a trusted brand builds its own network effects. Consistently building this reputation increases people’s trust in them and makes them a go to destination.

Nobody had yet indexed all the homes in the US and brought them online. While sites like Apartments.com had started to do so for rentals, it wasn’t until Zillow (and Trulia) that this was done for homes. There was fertile search real estate to grab and Zillow rushed out to claim it all using the Zestimate as its spearhead.


Zooplus vs Amazon in battle for the European pet supply market

Many e-commerce companies go through this cycle where their customer acquisition costs look fantastic because early adopters are cheaper to acquire, but then marketing expenses later go through the roof. Ironically, many direct-to-consumer companies in the US have started opening physical stores because that is cheaper marketing than online ads.

Zooplus discussed this on their Q3 2018 call. They said online ad pricing has increased because their competitors are shifting more ad budget to online. Facebook and Google ads are auctions, so more competition means more demand and thus higher prices. Today, 80% of Zooplus’s marketing spend is online ads and Google Shopping. That makes them very susceptible to competitor pressure.

My concern isn’t so much that Zooplus loses share to Amazon, but that Amazon has the scale to price pet food at a lower margin (or loss) if they want to. This could cap Zooplus’s ability to ever earn a profit. Amazon doesn’t need to overtake Zooplus in market share to negatively affect them because Amazon already has enough market share that lowering prices would harm Zooplus. In this scenario, it’s possible that Zooplus keeps their market share, continues to grow along with the online pet supply market, and still never reaches their profitability goal.

Why I don’t think Amazon needs more market share to harm Zooplus is because of the lack of switching costs in Zooplus’s business. Even though Zooplus has a 95% retention rate with its customers, if Amazon lowered their prices 10%, there’s not much that keeps most of Zooplus’s customers using their website. Zooplus seems well aware of this issue and it has tied their hands when it comes to price increases. On the Q2 2018 call, management said they “don’t want to be the first [pet retailer] sticking their head out passing on manufacturer prices increases.”


Amazon 2018 letter to shareholders

As a company grows, everything needs to scale, including the size of your failed experiments. If the size of your failures isn’t growing, you’re not going to be inventing at a size that can actually move the needle. Amazon will be experimenting at the right scale for a company of our size if we occasionally have multibillion-dollar failures. Of course, we won’t undertake such experiments cavalierly. We will work hard to make them good bets, but not all good bets will ultimately pay out. This kind of large-scale risk taking is part of the service we as a large company can provide to our customers and to society. The good news for shareowners is that a single big winning bet can more than cover the cost of many losers.

Uber Global Ridesharing Footprint
Percentages are based on our internal estimates of Gross Bookings and miles traveled using our currently available information.

Ensemble Capital: Landstar Systems update

The U.S. truck driver supply is structurally constrained. According to the Bureau of Labor Statistics, the average age of a U.S. truck driver is 55 years old. The core “trucking generation” aged 45 to 54 accounts for 29.3 percent of the labor force, while 25 to 34-year-olds are just 15.6 percent of truck drivers. We’ve seen trucking companies offering huge cash signing bonuses to licensed commercial drivers, without a noticeable jump in the driver pool. In short, there aren’t enough young drivers coming up to replace the older ones.

The average Landstar BCO driver earned a record $197,000 in gross revenue. Now, that’s before expenses like gas, maintenance, and tires, but still a great income. In fact, it was so good last year that some BCOs decided to take the last few weeks of December off – they’d already made more money than they needed for the year. The agent node of the Landstar network also had a record-setting 2018, with 608 agents generating more than $1 million of revenue – up from 542 in 2017.

Given this success, we think Landstar’s network is strengthening. It’s attracting more truckers and agents – indeed, Landstar recently said both the BCO and agent pipelines are full, despite a tight labor market. This creates a virtuous cycle. When Landstar adds truckers and agents, more shippers make Landstar their first and only call to move their freight. In turn, more shippers attract more truckers and agents to Landstar. And so on. An important point to make about Landstar is that it generates 70% incremental operating profit margins on net revenue and their market share is under 10%. We think they have plenty of room to drive profit growth in the decade to come.

As for recession risk, Landstar is a capital-light business with a mostly variable cost structure. Remember, BCO-derived gross margins remain steady throughout the cycle. Landstar’s gross margins fall in periods of strong demand, as lower-margin brokerage operations account for a greater percentage of revenue. Without the BCO structure, Landstar would be far more sensitive to the ebb and flow of the industrial economy. So, while far from recession proof, Landstar is recession resistant.

The second technological threat is autonomous-driving trucks. While the technology is perhaps already there, we think regulations will require a human driver or engineer to be in the truck cab for some time to come. Airplanes, trains, and other heavy transportation vehicles, for example, use various amounts of “autopilot” but still have captains, conductors, and engineers at the ready. As we’ve seen with autonomous driving automobiles, there’s massive headline risk for any accident related to driverless vehicles, even if, on the whole they are safer than human-driven vehicles. Also, we expect that any initial shipments by autonomous trucks will carry commodity, low-cost items like boxes of diapers and food. Landstar carries a lot of special loads like automotive, machinery, and hazmat, where we think human drivers will remain the standard due to the costly freight and related liabilities.

Disney already has a booming streaming service. It’s called Hotstar

Disney is taking on Netflix with a new streaming service in the United States. But there’s an even bigger and hotter market where it’s already winning by miles — India. Hotstar, which Disney bought from 21st Century Fox last year, already has nearly as many users as the entire US population. And it’s growing incredibly fast.

The Indian platform now has 300 million monthly active users, Disney (DIS) revealed during its investor day on Thursday. That means its user base has quadrupled in a little over a year — Hotstar had around 75 million monthly active users in India at the end of 2017. Disney is already way out in front thanks to Hotstar. At the end of 2017, the Indian platform dwarfed Amazon and Netflix, which had 11 million and 5 million Indian users respectively, according to Counterpoint Research.

A breast milk ingredient is the hot new health supplement for adults

Global chemical giants DowDuPont Inc. and BASF SE are investing millions to ramp up production of an indigestible sugar found naturally in breast milk. Infant formula makers like Nestle SA can’t get enough of the synthetic ingredient. Now the companies are eyeing a potentially bigger customer: adults. DuPont estimates the annual market could reach $1 billion.

Human milk oligosaccharide is the third most common solid in breast milk, after lactose and fat. HMO escapes digestion, allowing it to reach the colon where it feeds beneficial bacteria. HMOs may explain why breast-fed babies tend to fare better than formula-fed, said Rachael Buck, who leads HMO research at Similac formula-maker Abbott Laboratories.

DuPont plans to spend $40 million building out its HMO production capacity this year, its second biggest capital investment after expanding a factory that makes Tyvek. Meanwhile, it’s partnering with Lonza Group AG to make enough product to meet current demand. DuPont will become a stand-alone company when it splits from DowDuPont on June 1.

After two decades of research, Abbott was first to bring HMOs to the U.S. baby nutrition market in 2016. It’s now expanded to 15 countries. Nestle last year rolled out HMO formula in Gerber and other brands across 40 countries. HMOs nourish bacteria that “train’’ immune system cells, 80 percent of which reside in the gut, said Jose Saavedra, Nestle chief medical officer. The health claims propelled about $600 million in sales of HMO formula last year for each of Abbott and Nestle SA.

Danish biotechnology company Glycom S/A is targeting the adult digestive health market with HMO supplements it began selling in the U.S. and Europe late last year. The company touts its Holigos IBS product as managing symptoms of irritable bowel syndrome, including abdominal pain, constipation diarrhea and bloating. It sells 28 doses on Amazon.com for $50.

Recycling isn’t about the planet. It’s about profit.

Oil had reached a two-year high, and soda bottles are made of PET, which, like all plastics, is basically just processed oil. As the price of “raw” plastic increased, recycled plastic—a natural substitute for manufacturers—became more expensive too. What was good for cities’ recycling programs was bad for the companies that did business with them. The Coca-Cola Company’s Spartanburg, South Carolina, plant, which had opened in 2009 to recycle old soda bottles into new ones, idled as recycled PET plastic prices went through the roof.

Americans are still diligently filling our blue bags with everything we can, but there are fewer places for our dirty goods to go to find redemption. That’s in part thanks to China’s 2017 decision to shut the door on imports of recycled materials, ending a two-decade stretch during which the U.S. came to rely on the country to take and process about 70 percent of its used paper and 40 percent of its used plastic. In 2017, Republic Services, the second-largest waste collector in the U.S., was selling about 35 percent of its recyclables to China. By the end of 2018, China’s National Sword policy, which banned plastics outright and placed strict standards on paper imports, brought that number down to 1 percent.

After China stopped buying, a supply glut sent prices for recycled materials down, and fast. Recyclers found themselves dumping paper in landfills outside Seattle and incinerating plastic in the suburbs of Philadelphia. Glass recycling is local but expensive, and its reuse had often been subsidized by paper and plastic, so with paper and plastic prices in freefall, glass disposal became more of a burden too. In October, Northeastern recyclers were sending just 54 percent of the bottles they collected to processors for reuse. The rest were basically landfilled.

The hunger of Chinese manufacturers for wood pulp, plastic, and aluminum can’t be met by Chinese suppliers or even big commodity exporters like Brazil and Indonesia. Chinese importers solved this problem by buying enormous amounts of recyclables to substitute for raw materials. China went from bringing in 7 million tons of recycled material between 1994 and 1998 to 104 million tons between 2009 and 2013—a 15-fold increase.

Did capitalism kill inflation?

In other words, the capitalists killed inflation. In the decades after World War II, Polish economist Michal Kalecki depicted inflation as a product of the struggle between business and labor. If workers manage to extract big wage increases, their employers recoup the costs by putting through price increases, forcing workers to seek even more, and so on in a wage-price spiral. In contrast, if workers have little or no leverage, as is now the case in many industries, the wage-price spiral never gets started.

The importance of working with “A” players

I observed something fairly early on at Apple, which I didn’t know how to explain then, but I’ve thought a lot about it since. Most things in life have a dynamic range in which [the ratio of] “average” to “best” is at most 2:1. For example, if you go to New York City and get an average taxi cab driver, versus the best taxi cab driver, you’ll probably get to your destination with the best taxi driver 30% faster. And an automobile; what’s the difference between the average car and the best? Maybe 20%? The best CD player versus the average CD player? Maybe 20%? So 2:1 is a big dynamic range for most things in life. Now, in software, and it used to be the case in hardware, the difference between the average software developer and the best is 50:1; maybe even 100:1. Very few things in life are like this, but what I was lucky enough to spend my life doing, which is software, is like this. So I’ve built a lot of my success on finding these truly gifted people, and not settling for “B” and “C” players, but really going for the “A” players. And I found something… I found that when you get enough “A” players together, when you go through the incredible work to find these “A” players, they really like working with each other. Because most have never had the chance to do that before. And they don’t work with “B” and “C” players, so it’s self-policing. They only want to hire “A” players. So you build these pockets of “A” players and it just propagates.

In my experience solving difficult problems, the best talent available rarely led to the best solutions. You needed the best team. And the best team meant you had to exercise judgment and think about the problem. While there was often one individual with the idea that ultimately solved the problem, it wouldn’t have happened without the team. The ideas others spark in us are more than we can spark in ourselves.

Curated Insights 2018.11.30

What’s next for marketplace startups? Reinventing the $10 trillion service economy, that’s what.

The service economy lags behind: while services make up 69% of national consumer spending, the Bureau of Economic Analysis estimated that just 7% of services were primarily digital, meaning they utilized internet to conduct transactions.

In the a16z portfolio, Honor is building a managed marketplace for in-home care, and interviews and screens every care professional before they are onboarded and provides new customers with a Care Advisor to design a personalized care plan. Opendoor is a managed marketplace that creates a radically different experience for buying and selling a home. When a customer wants to sell their home, Opendoor actually buys the home, performs maintenance, markets the home, and finds the next buyer. Contrast this with the traditional experience of selling a home, where there is the hassle of repairs, listing, showings, and potentially months of uncertainty.

Managed marketplaces like Honor and Opendoor take on steps of the value chain that platforms traditionally left to customers or providers, such as vetting supply. Customers place their trust in the platform, rather than the counterparty of the transaction. To compensate for heavier operational costs, it’s common for managed marketplaces to actually dictate pricing for services and charge a higher take rate than less-managed marketplace models.

The last twenty years saw the explosion of a number of services coming online, from transportation to food delivery to home services, as well as an evolution of marketplace models from listings to full-stack, managed marketplaces. The next twenty years will be about the harder opportunities that software hasn’t yet infiltrated–those filled with technological, operational, and regulatory hurdles–where there is room to have massive impact on the quality and convenience of consumers’ everyday lives.

The services sector represents two-thirds of US consumer spending and employs 80% of the workforce. The companies that reinvent various service categories can improve both consumers’ and professionals’ lives–by creating more jobs and income, providing more flexible work arrangements, and improving consumer access and lowering cost.

Country stock markets as a percent of world

Keyence’s miraculous margins

The outsourcing reduces capital expenditure costs, and the associated depreciation, as there’s no machinery to purchase. It is also said to help Keyence to retain its valuable intellectual property. Suppliers, according to Morten Paulsen, Head of Research at CLSA Japan, have no visibility on how the respective pieces of the product puzzle fit together.

But Keyence are not the only business to run a “fabless” model. Apple, perhaps the most successful consumer brand of all time, outsources the creation of its iPhone to Taiwanese Foxconn. It reported operating margins of 26 per cent last quarter. Similarly, semiconductor designers such as Nvidia, Broadcom and Qualcomm also outsource to businesses like Taiwan Semiconductor. Their margins tend to range from 20 per cent to 40 per cent.

Keyence is also excellent at leveraging its suppliers, which it does “in a cleverer way than any other company I’ve seen”, he told us. Indeed, Keyence often has multiple suppliers manufacturing the same part, which stops one raising prices in fear of losing orders to competitors. Further to this, Keyence develops some of its manufacturing processes in house, then trains the suppliers, which means it can switch suppliers with greater ease than most if it begins to get strong armed, Paulsen argues.

What about its products? To its credit, Keyence has positioned itself right at the forefront of several key trends in an era of increasing factory automation, such as sensors which detect infinitesimal assembly-line mistakes. Customers, such as automakers — which make up roughly 25 per cent of its sales, according to Paulsen — are happy to pay top dollar for products that pay for themselves in 2 years, giving Keyence some degree of pricing power.

The reason for achieving high profitability is to maximise customer’s evaluation of products with high value added — that is, for customers, “I do not think it is expensive” and “I think it is cheap if it [our problem] can be solved” . . . As we explore the potential needs of our customers and develop them [the products] in advance, about 70 per cent of the new products of Keyence are the industry’s first and world’s first product as a result. Even in terms of management, we concentrate resources on product planning and design . . . we are trained to not only sell goods but also propose ideas that can solve customer’s problems.

Amazon, with little fanfare, emerges as an advertising giant

“The online retailer has ascended to the No. 3 spot in the U.S. digital ad market behind the dominant players, Alphabet Inc.’s Google and Facebook Inc. Though Amazon has just 4% of the market now, the company is expanding its avenues for marketers and hiring aggressively for its ad unit.

Amazon’s ad revenue is on pace to double this year, to $5.83 billion, according to eMarketer. Its ad sales are expected to jump $28.4 billion over the next five years, according to Cowen & Co.—more than the combined increases in ad revenue for all television networks globally, according to figures from media-buyer GroupM.”

Amazon’s ad business now contributes to gross profit and is expected to generate more income than its cloud business—which currently provides the bulk of its profits—as soon as 2021, according to Piper Jaffray analysts.

Amazon is expected to collect 15 cents of each new dollar spent on U.S. digital ads in 2020, up from 5 cents last year, according to an analysis of data from research firm eMarketer.

Why doctors hate their computers

This, I discovered, was the real reason the upgrade cost $1.6 billion. The software costs were under a hundred million dollars. The bulk of the expenses came from lost patient revenues and all the tech-support personnel and other people needed during the implementation phase.

Optimize your programming decisions for the 95%, not the 5%

Without having a deep understanding of what you’re developing and have put in the time to come up with good abstractions based on real experience, you’re just shooting in the dark hoping your generic user system works for all cases when you haven’t even programmed it yet for 1 use case. How is that even possible to do?

When you blindly follow what Google and other massive companies are doing, you’re optimizing for the 5% in a slightly different way. Instead of just getting your app up and running and seeing how it goes, you try to make decisions so that your application can be developed by 100 different teams sprawling across 5,000 developers. Meanwhile it’s just you developing the app by yourself in nearly all cases for new projects.

As soon as you start trying to make it work for a real application, or more specifically, your application, it all falls apart until you spend the time and really learn what it takes to scale an application (which is more than just picking tools). The companies that created these tools have put in the time over the years and have that knowledge, but that knowledge is specific to their application.

Premature optimization is the root of all evil (or at least most of it) in programming.

Optimizing for the 5% is a type of premature optimization. Maybe not so much for your development environment choices, but certainly for the other cases. Base your decisions on optimizing for the 95%, keep it simple and see how it goes. In other words, optimize when you really need to not because of “what if”.

Curated Insights 2018.11.02

Steve Jobs had an incredible definition of what a company should be

The company is one of the most amazing inventions of humans, this abstract construct that’s incredibly powerful. Even so, for me, it’s about the products. It’s about working together with really fun, smart, creative people and making wonderful things. It’s not about the money. What a company is, then, is a group of people who can make more than just the next big thing. It’s a talent, it’s a capability, it’s a culture, it’s a point of view, and it’s a way of working together to make the next thing, and the next one, and the next one.


Fossil fuels will save the world (really)

That fossil fuels are finite is a red herring. The Atlantic Ocean is finite, but that does not mean that you risk bumping into France if you row out of a harbor in Maine. The buffalo of the American West were infinite, in the sense that they could breed, yet they came close to extinction. It is an ironic truth that no nonrenewable resource has ever run dry, while renewable resources—whales, cod, forests, passenger pigeons—have frequently done so.


Gundlach: People want to be told what to think. I don’t

My biggest lesson that I’ve learned… I have the same flaw that every human being has and that is: As you’re growing up and getting older, you believe that everybody’s like you. You just extrapolate your personality traits and proclivities on other people. Then you start to realize increasingly, that that’s not true. And I believed, therefore, that everybody was intellectually objective and honest and wanted to figure things out for themselves. And I didn’t understand, for probably as long as 20 years, why I couldn’t convince people of almost mathematically analytical arguments regarding markets. And it was finally after years of this that I realized that people actually want to be told what to think.

It took me a long time to understand that. Not me, see, I don’t want to be told what to think. And so I figured nobody wants to be told what to think. But indeed, I think almost everybody wants to be told what to think. That creates a tremendous advantage in managing money. Because in that window of time between a fact and people being told what the fact means, you have a window if you’re capable of figuring out what it means – and don’t need to be told what it means – where you can actually act before other people and I found I’ve made a lot of money that way.

I remember when Ben Bernanke announced the Fed funds rate was going to stay at 0% for three years, and the markets didn’t move. And I had my traders look for this asset class in the bond market that would be the primary beneficiary of rate staying at zero for three years. And I said, “How much of the prices up?” And they said, “They’re not up at all.”

Assessing IBM’s $34 billion Red Hat acquisition

Dan Scholnick, general partner at Trinity Ventures, whose investments have included New Relic and Docker, was not terribly impressed with the deal, believing it smacked of desperation on IBM’s part. “IBM is a declining business that somehow needs to become relevant in the cloud era. Red Hat is not the answer. Red Hat’s business centers around an operating system, which is a layer of the technology stack that has been completely commoditized by cloud. (If you use AWS, you can get Amazon’s OS for free, so why would you pay Red Hat?) Red Hat has NO story for cloud,” he claimed in a statement.

Forrester analyst Dave Bartoletti sees the cloud native piece as being key here. “The combined company has a leading Kubernetes and container-based cloud-native development platform, and a much broader open source middleware and developer tools portfolio than either company separately. While any acquisition of this size will take time to play out, the combined company will be sure to reshape the open source and cloud platforms market for years to come,” he said.


IBM’s old playbook

The best thing going for this strategy is its pragmatism: IBM gave up its potential to compete in the public cloud a decade ago, faked it for the last five years, and now is finally admitting its best option is to build on top of everyone else’s clouds. That, though, gets at the strategy’s weakness: it seems more attuned to IBM’s needs than potential customers. After all, if an enterprise is concerned about lock-in, is IBM really a better option? And if the answer is that “Red Hat is open”, at what point do increasingly sophisticated businesses build it themselves?

The problem for IBM is that they are not building solutions for clueless IT departments bewildered by a dizzying array of open technologies: instead they are building on top of three cloud providers, one of which (Microsoft) is specializing in precisely the sort of hybrid solutions that IBM is targeting. The difference is that because Microsoft has actually spent the money on infrastructure their ability to extract money from the value chain is correspondingly higher; IBM has to pay rent:

The threat of Amazon’s content strategy

Even if content is created by a publisher and merely distributed through the tech platform, the tech company still captures its data; Netflix, for example, doesn’t share ratings data with TV producers, and Amazon doesn’t share Kindle readership data with the publishing industry. Meanwhile, Facebook actually shared false data with brands about their video’s viewership for years.

  • Anheuser-Busch InBev acquired a stake in RateBeer, a leading beer review platform, and October, a beer culture website.
  • Popular makeup startup Glossier initially launched as a content site; it then used insights gathered from users to develop its own line of cosmetics. Now, it aims to launch a new social commerce platform to encourage user reviews and feedback.
  • L’Oreal invested in Beautycon Media, which creates digital beauty content and hosts festivals for influencers
  • Mattress startup Casper even launched its own magazine; the current issue includes features like “A skeptic’s guide to crystals” and an adult coloring book.

Social Capital’s Chamath Palihapitiya says ‘we need to return to the roots of venture investing’

“The dynamics we’ve entered is, in many ways, creating a dangerous, high stakes Ponzi scheme. Highly marked up valuations, which should be a cost for VCs, have in fact become their key revenue driver. It lets them raise new funds and keep drawing fees.”

“VCs bid up and mark up each other’s portfolio company valuations today, justifying high prices by pointing to today’s user growth and tomorrow’s network effects. Those companies then go spend that money on even more user growth, often in zero-sum competition with one another. Today’s limited partners are fine with the exercise in the short run, as it gives them the markups and projected returns that they need to keep their own bosses happy.”

“Ultimately, the bill gets handed to current and future LPs (many years down the road), and startup employees (who lack the means to do anything about the problem other than leave for a new company, and acquire a ‘portfolio’ of options.)”

The coming storm for consumer staples dividends

AB InBev argued that by taking its leverage down to 2x net debt/EBITDA, it will reduce its cost of capital and “maximize total enterprise value.” All else equal, a lower cost of debt would in theory increase enterprise value, yet AB InBev already has solidly investment-grade credit ratings (e.g., A- from S&P). A ratings upgrade within the investment-grade space would likely only have a marginal impact on lowering cost of debt. Deleveraging could even increase its cost of capital, as more expensive equity takes a greater share of the capital structure.

Ultimately, a company’s dividend should be affordable, reflect the growth in shareholder value creation, and help management more prudently select high-return projects rather than pursue wasteful “empire building” deals. Dividends can be a problem, however, when they become too generous and handcuff management’s ability to invest in high-return projects and defend or widen the firm’s economic moat. When this happens, a dividend “rebasing” or “cut” would benefit long-term shareholders.


Uber-inequality

Uber received proposals from investment banks that pegged the ride-hailing firm’s IPO valuation at $120B. So, that posits Uber’s value is greater than the value of the US airline industry or the US auto industry (excluding Tesla). I love Uber and think the firm is genius. But that valuation is insane. Uber’s model doesn’t have the moats of an auto firm or even Airbnb, which must create global demand and supply (a local competitor to Airbnb doesn’t work, as visitors from other countries wouldn’t know about it). In contrast, local on-demand taxi services abound, even if without an app. The 120K readers of this newsletter could each put in $250, and boom — we have the number-three ride-hailing firm in Miami. Who’s with me?

In today’s economy, innovation means elegant theft: robbery of your data, privacy, health insurance, or minimum-wage protection. Uber has 16K employees and 3M driver partners. “Driver partner” means some great things. It means you don’t have to show up to an office. And it means you can work whenever you want — this is key. When I speak to Uber drivers, I always ask, “Do you like working for Uber?” The overwhelming majority say yes and reference the flexibility. I’ve been especially struck by how many need the flexibility, as they’re taking care of someone who’s sick. So many people taking care of others. So many people loving other people. And it comes at a huge cost. Many of them used to have jobs with benefits. Many had to move to a strange place to take care of their sister, mother, nephew.

The economic value of artificial intelligence

In the near term, around $6.6 trillion of the expected GDP growth will come from productivity gains, such as the continued automation of routine tasks. Over time, increased consumer demand for AI-enhanced offerings will overtake productivity gains and result in an additional $9.1 trillion of GDP growth by 2030.

China is expected to see the greatest economic gains from AI, a $7 trillion or 26% boost in GDP growth. One reason is the high proportion of China’s GDP that is based on manufacturing, where AI is expected to have a particularly big impact between now and 2030. Even more important over the longer term is China’s higher rate of AI investments compared to North America and Europe.

China is expected to see the greatest economic gains from AI, a $7 trillion or 26% boost in GDP growth. One reason is the high proportion of China’s GDP that is based on manufacturing, where AI is expected to have a particularly big impact between now and 2030. Even more important over the longer term is China’s higher rate of AI investments compared to North America and Europe.

In North America, the economic gains from AI are expected to reach $3.7 trillion or 14.5% of GDP growth by 2030. North America will see the fastest growth in the near term, given its current lead in AI technologies, applications, and market readiness. But China will likely begin to catch up by the middle 2020s given its accelerating AI investments.


A.I. is helping scientists predict when and where the next big earthquake will be

Some of the world’s most destructive earthquakes — China in 2008, Haiti in 2010 and Japan in 2011, among them — occurred in areas that seismic hazard maps had deemed relatively safe. The last large earthquake to strike Los Angeles, Northridge in 1994, occurred on a fault that did not appear on seismic maps.

Curated Insights 2018.10.19

AMA with Steli Efti

A lot of times, people who are insecure about their product will offer it for free as a way to feel more comfortable, as a way to offer the customer something that’s “fair”. I would argue strongly against that. If you’re inclined to do that, don’t. Instead, ask them for money, tell them it’s completely refundable, and then don’t under any circumstance spend that money. Put it in a separate bank account. It’s not revenue until the customer has stayed for six months and says that they are happy with everything—then you can touch the money.

This has the same effect as giving your product away for free—there’s zero risk for the customer—but by doing this you’ll weed out bad customers and you’ll learn how to get customers to pay you. In the enterprise world, if you’re not putting a price tag on your product, it’s not going to be valued. A lot of times people think I’m going to start by not asking for money and then it’ll organically lead to asking for money. That’s not true. You have to charge enterprise customers, no matter how early it is. If you don’t, a lot of people are going to be friendly and give you pleasant feedback. “Oh, new technology, of course I want to see this!” It’s even going to feel like you’re accomplishing things. But you’ll be wasting your time.

Netflix’s pricing power

Despite steadily increasing the quality of its service for customers, Netflix’s pricing has lagged the growth of that consumer value leading to the build up of a large consumer surplus. That surplus, or the excess consumer value over the price of the service, is an important factor that has driven such a rapid rate of growth for the service. The bigger the surplus, the better the deal for the consumer. But this also results in a sub-optimal return for the shareholder, at least in the short run, which can look like an inferior business model if you don’t look more carefully.

The power of the model is to realize that the consumer surplus represents latent pricing power that can be reallocated via price increases or reinvestment changes towards future profits for shareholders. In Netflix’s case, we believe this is an important lever in managing the rate of its growth and returns. By offering a compelling value proposition to incremental consumers, Netflix drives subscriber growth because it is a fantastic deal at $10/month. The consumer surplus is an investment in Netflix’s rapid growth, an implicit subscriber acquisition expense in the form of foregone revenue and profit, intentionally leveraged to quickly scale so that nearly all traditional media incumbents would be left too far behind when they awoke to the direct to consumer global scale streaming video opportunity. It’s clear at this point that this strategic goal has either been accomplished or nearly has.

Tesla through the lens of Apple

Tesla picks up on Apple’s vertical integration strategy but takes it further. In addition to hardware, software, and retail, Tesla also owns and operates manufacturing facilities as well as a global supercharger network. Vertically integrating battery pack production at its Gigafactory is why Tesla is the only high volume EV manufacturer today. Had Tesla waited for the supply chain to catch up, it wouldn’t have been able to launch and scale the Model 3 for years. In our view, this is a key reason why no auto maker has released a viable competitor to the Model 3 thus far and why no company will be able to do so until 2020 at the earliest.

Tesla has spent more than a decade preparing for this moment and, in our view, has the most compelling EV pipeline of any company. The Tesla Model 3 and Model Y (a crossover SUV) have the potential to catapult EVs into the mainstream, much like the one-two punch from the iPhone and iPad in mobile computing. In the U.S. the Model 3 competes in a price category that has three times the addressable market of the Model S, and the price category where the Model Y is likely to compete has an addressable market eight times larger than the Model X. Scaled globally, if the Model 3 and Model Y are as successful as the S and X in their respective segments, Tesla should be able to generate on the order of $65 billion sustainably, even on a distribution footprint that constrains it from selling in 26 states and imposes severe price penalties on its imports into China—the world’s largest EV market. Follow-on products, such as the pickup, the semi-truck, and the Roadster, will pave the way for at least a decade of rapid growth.

While Tesla’s and Apple’s product strategy and business models share many similarities, their financial pictures could not be further apart. Apple had $9 billion in cash in 2007, while Tesla has $12 billion of long-term debt today. Apple’s gross margins were approaching 40%, while Tesla’s are 14%, and Apple spent 6% of its revenues on capital expenditure compared to Tesla’s 26%.4 In other words, Tesla’s business today is less profitable and more capital intensive than was Apple’s in 2007, a seemingly inferior model made more questionable by its substantial debt load and meager cash flows.

Adobe remains a creative software king

Great software companies have more than one act, and Act 2 for Adobe has centered on analytics and digital marketing initiatives, which are currently housed in the digital experience segment. Adobe’s prowess in creative content has allowed it to nab synergies in the digital marketing space, cross-selling to enterprise chief marketing officers already using Adobe’s software. The product, now dubbed Experience Cloud, operates in a nascent and growing industry, but Adobe’s end-to-end functionality, built internally and through acquisitions such as Omniture, TubeMogul, Magento, and Marketo, has meant it is largely regarded as the leader in the space. As companies look to create omnichannel, targeted ad campaigns, Adobe’s marketing software has become a mission-critical offering for major brands and enterprises. Experience Cloud spans marketing, advertising, and analytics, among other features. It competes with the likes of Salesforce.com (CRM) and Oracle (ORCL), which compete in the broader customer relationship management space, but we think a rising tide can lift multiple boats, with optionality for Adobe to cement itself as a digital experience leader.


Ensemble Capital quarterly call transcript Q4 2018

An important point here is that Trupanion prices its policies based on how much it costs to treat a certain breed of a certain age in a certain zip code. Once Trupanion determines how much it costs to service an average pet based on the previous data points, it adds a 30% margin to calculate the pet’s premium payments.

Each state has its own insurance regulations and Trupanion says its Territory Partners are licensed where they need to be. Technically, Territory Partners do not sell directly to policyholders in the veterinary channel and Trupanion does not pay veterinarians or their staff for referrals. The actual solicitation of the policies is done on Trupanion’s website or over the phone with one of their licensed agents. We also believe Trupanion has increasingly viewed state regulators as partners and it has added to its compliance department in recent years. That said, state insurance regulations are intentionally vague and give regulators a lot of discretion in enforcement. As such, we won’t be surprised if there’s some adverse regulatory news during our investment. But the magnitude of these events and their impact on the long-term success of the business should be kept in context.

We believe that Trupanion customers are by-and-large extremely satisfied with the product – Trupanion consistently produces monthly retention rates above 98.5% and has growing customer referrals. Surveys also show that veterinarians recommend Trupanion more frequently than any other pet insurance offering. We also believe that the company is facilitating a positive ecosystem that creates value for all the parties involved — pet owners, pets, and veterinarians.

Booking has intentionally focused on these areas because hotel reservations are far more profitable than airfare and market fragmentation outside the US makes hotels far more dependent on Booking than those in the US. In the US, the top 10 hotel chains lead the market with many travelers going directly to Hilton.com or Hyatt.com to book a room. While in Europe and Asia, independent hotels dominate, and these hotels need some sort of central “marketplace” on which travelers can find them.

Booking is so dominant that one risk they run is letting their heavy spending on advertising (Google ads or ads on other travel sites such as TripAdvisor) push up the going rate on these auction-based ads. With that in mind, the company strategically reduced their spending on these sorts of ads starting last year in an attempt to reduce market prices and reinvest in driving visitors directly to their website. One casualty of this move was online hotel metasearch site Trivago, which was so dependent on Booking’s ad spend that the company’s strategic shift lead to Trivago’s revenue growth to fall from +70% to a 20% decline over the last year, sending the stock down 80%. Rarely in our memory can we recall a competitive move by one of our holdings so completely debilitating another member of their industry.

Ctrip and Booking have essentially declared a truce with Booking owning a large stake (with the right to buy more) of Ctrip. In essence, their agreement funnels Chinese travelers using Ctrip to travel outside of China to Booking.com while many non-Chinese travelers traveling to China via Booking.com are routed to Ctrip. Why have they made this deal? Well, in the words of Ctrips CEO Jane Sun, “Booking.com is a global brand and in hotels, they are just so far ahead of anybody else. I think it will be very difficult for anybody to come close to them.”

How Netflix expanded to 190 countries in 7 years

Taken together, the elements of Netflix’s expansion strategy constitute a new approach that I call exponential globalization. It’s a carefully orchestrated cycle of expansion, executed at increasing speed, to an increasing number of countries and customers. The approach has helped the company expand far more quickly than competitors. Going forward, Netflix will face increasing competition not only from other global players such as Amazon Prime but also from new entrants and regional or local players. In that regard, it will have to continue to expand its blending of global and regional content.


Did Uber steal Google’s intellectual property? | The New Yorker

Indeed, even if the criminal investigation and the arbitration against Levandowski come to naught, in many ways Waymo and Google have already prevailed. “The people at Google got what they wanted,” one of the lawyers who represented Uber told me. “They got Anthony fired, they distracted Uber and slowed its progress for an entire year, and they let everyone know that if you leave with some of their stuff they can screw with you so bad that everyone will think you’re toxic.”

Porsche IPO could value carmaker as high as $81 billion, CFO says

Porsche is Volkswagen’s crown jewel and closely connected with its history. The companies were separate until Volkswagen acquired the Porsche brand in 2012 in the aftermath of a failed takeover attempt by the the descendants of Ferdinand Porsche. The family, which was forced to sell the maker of the 911 sports car after financing collapsed on the deal, still controls a majority of Volkswagen’s common stock and would need to sign off on any deal to spin off Porsche.

Ferrari’s listing in 2015 not only showed the supercar maker’s own value, but also exposed weaknesses at parent Fiat Chrysler Automobiles NV’s mass-market operations, Meschke said. Fiat was able to address these more specifically after the spin off, he said. While it’s been a windfall for the Italian-American auto maker, the strategy isn’t infallible. Aston Martin, another luxury sports-car maker that is seeking a Ferrari-like multiple, has slumped more than 20 percent since its London debut this month.

Points International poised for 72% reward

PCOM operates in the loyalty industry with an unfair advantage in airline loyalty programs. They work with: 7/10 largest airlines in North America; 2/10 largest airlines in Europe; 2/10 largest airlines in AMEA (Emirates was onboarded this year).

Little/no real competition except internal systems developed by airlines.

PCOM is typically the 2nd largest buyer of loyalty points after the banks. The loyalty industry is a large and growing.

In addition, PCOM has developed a software/technology layer that provides common functionality to all three businesses. This technology layer is what the company calls “Loyalty Commerce Platform”. In the last 5 years PCOM has invested heavily into developing this platform which now enables client onboarding in as little as 3 weeks. It also provides operating leverage as the system manages many of the functions previously managed by people.

It takes years of working with multi-billion-dollar brands to get access to their customer base. This represents a level of stickiness that cannot be built quickly with venture capital money. It is also resistant to disruptive technology.

Schadenfreude: reposting a 2011 post on Sears

My view: owning Sears as a property play is a demonstration of the arrogance and breathtaking naivete of much that passes on Wall Street. Sears Holdings has over 300 thousand employees. I don’t know how you successfully liquidate a business integrated with that many lives. I don’t know of anyone who has ever successfully liquidated a business with that many employees.** I am not sure it can be done and it certainly can’t be done by someone with my skill-set (highly analytical, ability to spy value or value traps but no people management skill and not much tact).

The idea that Sears was going to be managed/liquidated by a bunch of hedge fund guys (people like me) well – that was comical.

Just to stress the point for my fund manager friends who read accounts and have my skills (but like me are often disconnected from the businesses they invest in) I will state the obvious. The employees are living breathing people and as you pull the business apart the way you treat those people and how they think about you (and behave towards you) are critical to any value you extract in liquidation. Someone has to look these people in the eye and tell them they don’t have a job. And someone has to pick-and-choose which people to fire and which to retain. And they have to do this without destroying much of the value extracted along the way. They have to liquidate the firm in such a way that the value accrues to the liquidators and not to the people who are being screwed.

Curated Insights 2018.09.28

The problem with compounders

What is most important is you find a business with the correct business model that can grow sales. The sales engine of the company is the most important aspect, and also the one most overlooked by investors and analysts. Sure, cost structure matters, and business model matters as does “capital allocation”, which is what they do with the tiny bit of leftover money, but what matters most is sales.
Herein lies a problem. How do you determine that a small company with the correct business model will grow sales at a high rate? The only way to do that is to visit the company and talk to management. But talking to management isn’t enough. You need to sit down and discuss their sales strategy, understand who their employees are and evaluate the ability to execute on their plan.

This is clearly a dark spot for most analysts and investors. How do you determine if the sales manager is selling you, or knows what they’re talking about? Especially if there isn’t much in the way of results to look at? I believe it’s possible, but instead of having a solid background in financial analysis you need to have sales experience and understand the sales process. Instead of reading the newest book on investing strategies your bookshelf should be full of books on pricing, call strategies, how to approach demos, and prospecting. It’s also worth remembering that enterprise sales is a different beast from consumer sales, or small business sales.

When you start to put all the pieces of this puzzle together it starts to become more apparent why everyone didn’t invest in Starbucks, or Microsoft, or Oracle when they were tiny companies. To truly catch a compounder when they’re in infancy you need a set of skills that few investors possess. It’s not impossible to build out that skill set. Understanding this paradox also helps to expose the myth that buying high growth companies is a surefire way to success. Buying high growth companies IS a surefire way to success if you can buy them when they’re small enough and their market is large enough.


Different kinds of smart

Everyone knows the famous marshmallow test, where kids who could delay eating one marshmallow in exchange for two later on ended up better off in life. But the most important part of the test is often overlooked. The kids exercising patience often didn’t do it through sheer will. Most kids will take the first marshmallow if If they sit there and stare at it. The patient ones delayed gratification by distracting themselves. They hid under a desk. Or sang a song. Or played with their shoes. Walter Mischel, the psychologist behind the famous test, later wrote:

The single most important correlate of delay time with youngsters was attention deployment, where the children focused their attention during the delay period: Those who attended to the rewards, thus activating the hot system more, tended to delay for a shorter time than those who focused their attention elsewhere, thus activating the cool system by distracting themselves from the hot spots.

Delayed gratification isn’t about surrounding yourself with temptations and hoping to say no to them. No one is good at that. The smart way to handle long-term thinking is enjoying what you’re doing day to day enough that the terminal rewards don’t constantly cross your mind.


Investors want managers’ stories — Not track records — Data show

Seventy-seven percent of asset managers thought their messages were differentiated from peers, but only 21 percent of consultants believed that managers’ messages varied, according to Chestnut’s research. In addition, 75 percent of consultants who participated in the study, said their number one search criteria was investment process and portfolio construction. Manager narratives in the eVestment database, for example, get 3,000 views each month. Chestnut had 122 institutional investors and consultants participate in the study.

Amazon’s clever machines are moving from the warehouse to headquarters

Going forward, Amazon will need fewer people to manage its retail operations, a decided advantage over rivals like Walmart Inc. and Target Corp., which are both spending heavily just to catch up. “This is why Amazon is the 800-pound gorilla,” says Joel Sutherland, a supply-chain management professor at the University of San Diego. “Nobody else has the resources and expertise to pull all of these emerging technologies together to remove humans from the process as much as possible while making things more reliable and accurate.”

Faith in the technology grew as it improved. Workers were happy to see tedious tasks like managing inventory spreadsheets delegated to machines that did the work more quickly and accurately. “The numbers don’t lie,” Kwon says. “It’s a better model.”

A key turning point came in 2015 when the value of goods sold through the marketplace exceeded those sold by the retail team, the people say. The retail team, which had far more employees, watched its importance fade and money funneled into projects like Amazon Web Services and Alexa. It didn’t help that the marketplace generated twice the operating profit margin of the retail business—10 percent versus 5 percent, according to a person familiar with the company’s finances. In many international markets, the retail team has never turned a profit, the person says.

In annual sales meetings, a team of 15 people overseeing a retail category would see their growth outperformed by one person from the marketplace team, the people say. The lines between the teams began blurring. Amazon retail vendors had once enjoyed such advantages as video and banner advertising and access to daily deals that get millions of hits a day; now marketplace merchants got the same perks. Many brands became more interested in selling on the marketplace, where they—not the Amazon retail team—controlled prices, images and product descriptions.

“Computers know what to buy and when to buy, when to offer a deal and when not to,” says Neil Ackerman, a former Amazon executive who manages the supply chain at Johnson & Johnson. “These algorithms that take in thousands of inputs and are always running smarter than any human.”


Instagram’s CEO

This dynamic, by the way, was very much apparent when Snap IPO’d a year-and-a-half ago; indeed, Snap CEO Evan Spiegel, often cast as the anti-Systrom — the CEO that said “No” to Facebook — arguably had the same flaw. Systrom offloaded the building of a business to Zuckerberg; Spiegel didn’t bother until it was much too late.

Controlling one’s own destiny, though, takes more than product or popularity. It takes money, which is to say it takes building a company, working business model and all. That is why I mark April 9, 2012, as the day yesterday became inevitable. Letting Facebook build the business may have made Systrom and Krieger rich and freed them to focus on product, but it made Zuckerberg the true CEO, and always, inevitably, CEOs call the shots.


Now Facebook needs to worry about the Instagram founders’ next move

Tech companies with non-compete agreements for employees of up to one year rarely enforce them in full—especially in California, where courts have routinely thrown them out or severely restricted the scope of such agreements, Ted Moskovitz, a former SEC lawyer-turned-tech-entrepreneur, tells Barron’s. “California courts are extremely hostile to non-competes, and typically only enforce them where there is some other concern, like theft of trade secrets involved,” Moskovitz says. “California’s economy is highly reliant on innovation and the bringing to market of new ideas.”

The greater issue, he says, is whether Systrom and Krieger are taking proprietary and/or patented intellectual property with them.


Exclusive manager interview on Facebook

Imagine 100 years from today. My great great grandkids will have the ability to see who I was, what I was like, who I spent time with (if I give permission to Facebook to share my account prior to my death…?). This is a wonderful service for future generations. How could a company replicate such a wonderful service? All the photos, memories, comments, stories, and effort that we’ve put into the platform for the last 14 years has created a network and a legacy that I don’t believe will be easy to move or replace. We believe the moat around Facebook is getting wider everyday.

That being said, short-term data shows declines in user numbers for the youngest cohorts. This should be expected. Facebook becomes more interesting for people as they get older. As you age a mature you are posting pictures of your wedding day, your first child, your parents holding grandchildren, etc. You spend time staying in touch and looking at the lives of people that use to be very important in your life, like your brothers or friends from college, old work colleuges, etc. When you’re in high school you live with your family, you don’t have many friends that are scattered across the world, and you’re too cool to stay in touch with Mom and Dad. SnapChat makes way more sense for this young cohort. You can send inappropriate and temporary images as you discover who you are. I wouldn’t expect Facebook to ever really dominate the youngest cohorts, but I do expect that as this cohort matures many of them will spend less time and SnapChat and more time on Facebook. Priorities change overtime and Facebook definitely plays a critical and positive role in the world today.

Sirius XM’s deal to buy Pandora is a win for legacy media

It turns out that costly physical infrastructure and traditional linear programming don’t always doom media companies in their battle against digital upstarts. That’s a particularly relevant point today as Comcast bulks up to continue its battle against Netflix.

Sirius has a sticky business model, in which car buyers predictably turn on the Sirius XM radios that come pre-installed in new cars. We’re at the point where a growing number of used cars are being re-purchased with those same Sirius radios still installed, making used-car buyers a growing market for Sirius. But a satellite radio subscription still can’t match the ease of use or cost of Pandora’s smartphone app, which ranges from free to $10 a month for unlimited music.

In an investor presentation on Monday, Sirius noted that Pandora expands the company’s presence “beyond the vehicle,” while diversifying Sirius’ revenue stream by adding the country’s “largest ad-supported digital audio offering.” Sirius sees opportunity for cross-promotion between its 36 million paying subscribers and Pandora’s 70 million active listeners. The bulk of Pandora’s users are non-paying customers, but the company does have about six million paying subscribers. Sirius can now try to sell its subscription package into Pandora’s large user base.


Blackstone executives have eyes on new prizes

Blackstone has grown five-fold since its initial public offering in 2007, reaching nearly $440 billion in assets, largely on the back of private equity, real estate, hedge funds, and credit. Over the last 12 months, Blackstone has brought in a record $120 billion in investor capital.

Speaking at Blackstone’s Investor Day on September 21, president and COO Jon Gray stressed that Blackstone’s business requires very little capital. Of the $439 billion it manages, only $2 billion represents balance-sheet investments. Instead, it invests the assets of its clients, largely pension funds, endowments, and other institutions. Some of the firm’s future and early-stage initiatives, such as private wealth, involve tapping more mainstream investors.

Insurers are facing increasing regulatory capital requirements and continue to be squeezed by low interest rates. “They have no choice but to move into alternatives and private credit,” said James. Insurance companies, which hold a majority of their assets in fixed income are a natural fit with Blackstone, which is one of the largest originators of credit assets. Blackstone will both manage the assets for insurers like it does for any institution, and buy mature books of business where it takes on the entire balance sheet and manages both liabilities and assets. “This is a larger and more profitable business than simply having accounts to manage. There are hundreds of billions of insurance assets being sold as we speak,” he said.

Ronaldo: Why Juventus gambled €100m on a future payday

There are early signs the bet is paying off. While in secret talks to sign Ronaldo, Juventus increased average season ticket prices by 30 per cent. All 29,300 have been sold. On match day the Juventus stadium superstore is doing a brisk trade in Ronaldo replica shirts, costing up to €154.95 — among the highest prices in Europe. For his home debut, fans travelled from all over the world while television networks spent days trailing his arrival in Turin.

To sign the striker Juventus agreed to pay Real Madrid a €100m fee over two years, a further €5m in payments that will ultimately be paid to clubs that trained him as a young player, and about €12m in fees to his agent, Jorge Mendes. Ronaldo’s four-year contract provides a salary worth more than €50m a year after tax, according to reports. The remuneration package will also allow Juventus to use his “image rights”, so that the player — who earns an estimated $47m a year in personal endorsements — can also be used in Juventus promotional campaigns. Financial services firm KPMG estimates that, including the transfer fee, amortised over the duration of his contract, Juventus will pay around €340m, or €85m a year for Ronaldo’s services.


This 24-Year-Old built a $5 billion hotel startup in five years

Oyo employs hundreds of staffers in the field who evaluate properties on 200 factors, from the quality of mattresses and linens to water temperature. To get a listing, along with a bright red Oyo sign to hang street-side like a seal of good-housekeeping approval, most hoteliers must agree to a makeover that typically takes about a month. Oyo then gets 25 percent of every booking. Rooms usually run between $25 and $85.

Agarwal wouldn’t give sales numbers, but he said the number of transactions has tripled in the last year, with 90 percent coming from repeat travelers — and no money spent on advertising. There are now 10,000 hotels in 160 Indian cities, with more than 125,000 rooms, listed on the site, he said. That’s about 5 percent of India’s total room inventory, according to RedSeer estimates.

China claims more patents than any country—most are worthless

As of last year, more than 91 percent of design patents granted in 2013 had been discarded because people stopped paying to maintain them, according to JZMC Patent and Trademark data compiled for a Bloomberg query. Things aren’t much better for utility models with 61 percent lapsing during the same five-year period, while invention patents had a disposal rate of 37 percent. In comparison, maintenance fees were paid on 85.6 percent of U.S. patents issued in 2013, according to the United States Patent and Trademark Office.


The future of fish farming may be indoors

Bio-security routines that require sanitizing hands and dipping shoes in disinfectant bins minimize the risk of disease and the need for antibiotics that other forms of aquaculture heavily rely on, says Peterson, who has advised Nordic Aquafarms regarding best practices. However, just one employee who fails to complete the process correctly or neglects other basic protocol could contaminate the operation—with pathogens potentially looping through the recirculating system and killing an entire tank of fish. Large-scale companies could guard against this with monitoring equipment that lets them respond quickly to any issues, Peterson says, adding that strict government permits require routine monitoring that would also detect unusual levels of discharge in wastewater.

The real environmental toll of big indoor systems will depend on the capacity of local infrastructure, including the water supply, Timmons says. Recirculating systems can recycle more than 90 percent of tank water but some of it does get lost to evaporation or absorbed in solid waste each day. He calculates that a farm the size of the Belfast facility would (after the initial tank fill) consume about 1.65 billion liters of freshwater per year—roughly equivalent to the water use of about 12,000 people. But he notes even in a town of fewer than 7,000 people, like Belfast, this is within the capacity of the local aquifer—and is dwarfed by the volume of water the farm would recycle each year. In more drought-prone regions indoor aquaculture facilities could release wastewater for irrigating agricultural fields, reducing the water burden, Timmons adds.


Scientists finally crack wheat’s absurdly complex genome

This is already happening. Using the completed genome, the team identified a long-elusive gene (with the super-catchy name of TraesCS3B01G608800) that affects the inner structure of wheat stems. If plants have more copies of the gene, their stems are solid instead of hollow, which makes them resistant to drought and insect pests. By using a diagnostic test that counts the gene, breeders can now efficiently select for solid stems.


Nearly half of cellphone calls will be scams by 2019, report says

Nearly half of all cellphone calls next year will come from scammers, according to First Orion, a company that provides phone carriers and their customers caller ID and call blocking technology.

The Arkansas-based firm projects an explosion of incoming spam calls, marking a leap from 3.7 percent of total calls in 2017 to more than 29 percent this year, to a projected 45 percent by early 2019.

Everything you know about obesity is wrong

According to the Centers for Disease Control and Prevention, nearly 80 percent of adults and about one-third of children now meet the clinical definition of overweight or obese. More Americans live with “extreme obesity“ than with breast cancer, Parkinson’s, Alzheimer’s and HIV put together.


35 years ago today, one man saved us from world-ending nuclear war

Petrov did not report the incoming strike. He and others on his staff concluded that what they were seeing was a false alarm. And it was; the system mistook the sun’s reflection off clouds for a missile. Petrov prevented a nuclear war between the Soviets, who had 35,804 nuclear warheads in 1983, and the US, which had 23,305.

A 1979 report by Congress’s Office of Technology Assessment estimated that a full-scale Soviet assault on the US would kill 35 to 77 percent of the US population — or between 82 million and 180 million people in 1983. The inevitable US counterstrike would kill 20 to 40 percent of the Soviet population, or between 54 million and 108 million people.


Market research tricks

If you ask a question as close as possible to the claim you want to make, and ensure you survey a representative national sample of category users, any national chain in any category will beat competitors that are superior but only regionally available.

As a result of this research and ad campaign, one of Jimmy Dean’s regional competitors actually did its own research, but only in its regional area. The company found that it could beat Jimmy Dean in its region, and made its own ads that said in effect, “Did you really want to eat a breakfast sausage that people in both New York and San Francisco ate? No, you want (our) brand that tastes better to people like you and me here in (their local region).”

And because Taco Bell is pretty much ubiquitous, and enough people everywhere will vote for it because they haven’t found good, authentic Mexican food in their areas, it wins this title. There is no way that local restaurants, or even good regional chains, could compete with the sheer numbers of a national chain.

Curated Insights 2018.09.14

Risk, uncertainty and ignorance in investing and business – Lessons from Richard Zeckhauser

People feel that 50% is magical and they don’t like to do things where they don’t have 50% odds. I know that is not a good idea, so I am willing to make some bets where you say it is 20% likely to work but you get a big pay-off if it works, and only has a small cost if it does not. I will take that gamble. Most successful investments in new companies are where the odds are against you but, if you succeed, you will succeed in a big way.” “David Ricardo made a fortune buying bonds from the British government four days in advance of the Battle of Waterloo. He was not a military analyst, and even if he were, he had no basis to compute the odds of Napoleon’s defeat or victory, or hard-to-identify ambiguous outcomes. Thus, he was investing in the unknown and the unknowable. Still, he knew that competition was thin, that the seller was eager, and that his windfall pounds should Napoleon lose would be worth much more than the pounds he’d lose should Napoleon win. Ricardo knew a good bet when he saw it.

…in any probabilistic exercise: the frequency of correctness does not matter; it is the magnitude of correctness that matters…. even though Ruth struck out a lot, he was one of baseball’s greatest hitters…. Internalizing this lesson, on the other hand, is difficult because it runs against human nature in a very fundamental way… The Babe Ruth effect is hard to internalize because people are generally predisposed to avoid losses. …What is interesting and perhaps surprising is that the great funds lose money more often than good funds do. The best VCs funds truly do exemplify the Babe Ruth effect: they swing hard, and either hit big or miss big. You can’t have grand slams without a lot of strikeouts.

Risk, which is a situation where probabilities are well defined, is much less important than uncertainty. Casinos, which rely on dice, cards and mechanical devices, and insurance companies, blessed with vast stockpiles of data, have good reason to think about risk. But most of us have to worry about risk only if we are foolish enough to dally at those casinos or to buy lottery cards….” “Uncertainty, not risk, is the difficulty regularly before us. That is, we can identify the states of the world, but not their probabilities.” “We should now understand that many phenomena that were often defined as involving risk – notably those in the financial sphere before 2008 – actually involve uncertainty.” “Ignorance arises in a situation where some potential states of the world cannot be identified. Ignorance is an important phenomenon, I would argue, ranking alongside uncertainty and above risk. Ignorance achieves its importance, not only by being widespread, but also by involving outcomes of great consequence.” “There is no way that one can sensibly assign probabilities to the unknown states of the world. Just as traditional finance theory hits the wall when it encounters uncertainty, modern decision theory hits the wall when addressing the world of ignorance.


Hank Paulson says the financial crisis could have been ‘much worse’

While Bear Stearns’ failure in normal markets would not hurt the U.S. economy, we believed that the system was too fragile and fear-driven to take a Bear Stearns bankruptcy. To those who argue that Bear Stearns created moral hazard and contributed to the Lehman failure, I believe just the opposite—that it allowed us to dodge a bullet and avoid a devastating chain reaction.

If Bear had failed, the hedge funds would have turned on Lehman with a vengeance. Lehman would have failed almost immediately and the result would have been much worse than Lehman’s September failure, which occurred after we had stabilized Fannie Mae and Freddie Mac and Bank of Americaacquired Merrill Lynch. I would hate to imagine what would have happened if this whole thing started before we’d stabilized Fannie and Freddie.

An interview with Tim Geithner on this topic was done recently at the Yale School of Management and he speaks much more authoritatively on the limits of the Fed powers than I, but here goes. While our responses may have looked inconsistent, Ben, Tim, and I were united in our commitment to prevent the failure of any systemically important financial institution. But we had a balkanized, outdated regulatory system without sufficient oversight or visibility into a large part of the modern financial system and without the necessary emergency powers to inject capital, guarantee liabilities, or wind down a non-banking institution. So we did whatever we could on a case-by-case basis.

For Lehman, we had no buyer and we needed one with the willingness and capacity to guarantee its liabilities. Without one, a permissible Fed loan would not have been sufficient or effective to stop a run. To do that, the Fed would have had to inject capital or guarantee liabilities and they had no power to do so. Now, here’s the point that I think a lot of people miss: In the midst of a panic, market participants make their own judgments and a Fed loan to meet a liquidity shortfall wouldn’t prevent a failure if they believed Lehman wasn’t viable or solvent. And no one believed they were.

AIG is a cautionary tale. We should not have let our financial regulatory system fail to keep up with modern financial markets. No single regulator had oversight visibility or adequate powers to deal with AIG. Its insurance companies were regulated at the state level, its holding company was like a giant hedge fund sitting on top of the insurance companies, and it was regulated by the ineffective Office of Thrift Supervision, which also regulated—get this—Countrywide, WaMu, IndyMac, GE Capital. They all selected their regulator. So you get the picture, it’s regulatory arbitrage.

And I’m concerned that some of the tools we effectively used to stave off disaster have now been eliminated by Congress. These include the ability of Treasury to use its exchange stabilization fund to guarantee the money market funds, the emergency lending authority the Fed used to avoid the failure of Bear and AIG, and the FDIC’s guarantee of bank liabilities on a systemwide basis, which was critical.

The global smartphone supply chain needs an upgrade

At the peak in October 2017, smartphone components accounted for over 33% of exports from Taiwan, 17% of those from Malaysia and 16% from Singapore. Smartphones comprise 6% of Chinese exports. Memory chips flow from South Korea and Vietnam; system chips from Malaysia, Taiwan and elsewhere; and displays from Japan and South Korea. Rich-world firms, such as Qualcomm, sell licences to use their intellectual property (IP). The parts are then assembled, mainly by armies of Chinese workers.

Apple and 13 of its chip suppliers earn over 90% of the total pool of profits from the Apple system. Meanwhile the tail of other firms doing more basic activities must pay for most workers, inventories and fixed assets (see chart). So they have in aggregate a weak return on equity, of 9%, and a net profit margin of just 2%. Their earnings have not risen for five years. They include assemblers such as Taiwan’s Hon Hai and niche component makers, some of which are visibly struggling. On August 22nd AAC Technologies, a specialist in making phones vibrate, said its second-quarter profits fell by 39% compared with the previous year.

Apple, Samsung and most semiconductor makers could ride out such tensions, with their high margins and cash-laden balance-sheets. But the long chain of other suppliers could not, given their razor-thin margins, big working-capital balances and fixed costs. Tariffs could push them into the red. Of the 132 firms, 52% would be loss-making if costs rose by just 5%. And a ZTE-style cessation of trade would be disastrous. If revenues dried up and the 132 firms continued to pay their own suppliers, short-term debts and wages, 28% of them would run out of cash within 100 days.

If you are running a big firm in the smartphone complex, you should be reimagining things in preparation for a less open world. In a decade, on its current trajectory, the industry will be smaller, with suppliers forced to consolidate and to automate production. It may also be organised in national silos, with production, IP, profits and jobs distributed more evenly around the world. Firms will need to adapt—or be swiped away.

The story of Box: A unicorn’s journey to public success

The early days of Box’s selling file sharing and collaboration have largely been replaced by big corporate wins. One measure of Box’s success is its penetration of the Fortune 500—from 52% in the second quarter of 2016 to 69% in the same quarter of fiscal 2019. About 58% of Box’s total revenue comes from enterprises of 2,000 employees or more.

In Box’s recently completed fiscal quarter, it closed 50 deals of more than $100,000, compared with 40 a year ago; 11 deals of more than $500,000, versus eight a year ago; and two deals of more than $1 million, compared with four a year ago. It expects a strong pipeline of seven-figure deals in the back half of this year.

But in encouraging its salespeople to pursue bigger deals, Box increasingly faces competition from deeper-pocketed competitors in a total addressable market pegged at $45 billion, based on market research by Gartner and IDC.

Soccer fans, your team is coming after you

At the time of its 2012 initial public offering, Man United counted 659 million fans worldwide. Analysts estimate the team’s revenue this year will be about 587 million pounds ($763 million) — just $1.16 per supporter. Twitter Inc. has just 338 million active monthly users, yet enjoys revenue of $2.4 billion and a market value of $27 billion.

Digital marketing provides the opportunity for teams to put themselves in the middle of the sale of a service or product. It’s not simply about using a website or an app to sell fans more jerseys or baseball caps. It’s about turning the team into a platform, a way of connecting brands to customers, in the same way as Facebook Inc. and Alphabet Inc. already do.

Much in the way that price-comparison websites charge insurers or credit card companies for connecting them to customers, a sports team could, for example, offer its own exclusive video content with another provider’s mobile phone contract and take a cut of the proceeds. If that meant each fan were to spend just one more dollar a year with the club, it would provide a significant boost to sales.


Alibaba-backed apparel-sharing company YCloset brings sharing economy to a new level

Founded in December 2015, YCloset charges a monthly membership fee of 499 yuan and allows female users to rent unlimited clothes and accessories country-wide. Furthermore, users can choose to buy the apparel if they like to and prices fluctuate according to the rent count. Thus far, 75% of the income comes from membership fees and the remaining comes from sales of clothing. YCloset positions itself as a company that offers affordable luxury, professional and designer brand clothing. The company hopes to have the top famous brand to drive the long-tail brands.

In terms of business model, YCloset gradually shifted from one-time supplier purchase to brand partnerships with clothing companies. Brand partnerships allow revenue sharing between YCloset and their partners. To these clothing companies, YCloset gave them a new revenue, at the same time, they may get consumer insights from the data YCloset collects. In the future, YCloset will have joint marketing campaigns with the brands and assist in incubating new brands.

Autonomous delivery robots could lower the cost of last mile delivery by 20-fold

Last mile delivery – the delivery of goods from distribution hubs to the consumer – is the most expensive leg of logistics because it does not submit to economies of scale. The cost per last mile delivery today is $1.60 via human drivers but could drop precipitously to $0.06 as autonomous delivery robots proliferate.

Autonomous delivery robots are roughly seven times more efficient than electric vehicles on a mile per kilowatt basis. The major costs for autonomous delivery robots are hardware, electricity, and remote operators. Unlike in electric vehicles, the battery is not the largest cost component in slow moving robots. Air resistance is a function of velocity squared, suggesting that a robot traveling at four miles per hour loses much less energy than a car traveling at highway speeds to air resistance. As a result, rolling robots do not require large batteries, lowering both hardware and electricity costs relative to more traditional electric vehicles.

If rolling robots enable last mile delivery for $0.06 per mile, artificial intelligence could be advanced enough to improve their unit economics. A remote operator responsible for controlling robots in difficult or confusing situations probably will oversee roughly 100 robots, accounting for more than half of the cost per mile, as shown below. As autonomous capability improves, remote operators should be able to manage larger fleets of robots, bringing down the costs per robot.


Hospitals are fed up with drug companies, so they’re starting their own

A group of major American hospitals, battered by price spikes on old drugs and long-lasting shortages of critical medicines, has launched a mission-driven, not-for-profit generic drug company, Civica Rx, to take some control over the drug supply. Backed by seven large health systems and three philanthropic groups, the new venture will be led by an industry insider who refuses to draw a salary. The company will focus initially on establishing price transparency and stable supplies for 14 generic drugs used in hospitals, without pressure from shareholders to issue dividends or push a stock price higher.


Harvard Business School professor: Half of American colleges will be bankrupt in 10 to 15 years

There are over 4,000 colleges and universities in the United States, but Harvard Business School professor Clayton Christensen says that half are bound for bankruptcy in the next few decades. Christensen and co-author Henry Eyring analyze the future of traditional universities, and conclude that online education will become a more cost-effective way for students to receive an education, effectively undermining the business models of traditional institutions and running them out of business.

Christensen is not alone in thinking that online educational resources will cause traditional colleges and universities to close. The U.S. Department of Education and Moody’s Investors Service project that in the coming years, closure rates of small colleges and universities will triple, and mergers will double.

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.