Curated Insights 2018.09.21

Brent Beshore: Learning to pole vault

Marketing will only get you where you’re going faster. If your product isn’t valuable, marketing will help put you out of business, fast. The best way to build trust and generate attention is to be relatively excellent. I say “relatively” because some markets are more efficient/mature than others. The less developed a market, the less valuable you have to be in absolute terms. You just have to be better than everyone else. I don’t want to try to outcompete smart, well-read, and hard working people. I want to find the lowest bar to jump over and then get good at pole vaulting.

Picking your field is arguably more important to your success than your current skill and future capacity. In some segments of business, everyone makes lots of money and the very best do outrageously well. In other areas, even the very best often declare bankruptcy. It’s a base rate analysis. Assume you’re only going to be mediocre, then explore what business and life look like if that’s true. So choose your field wisely and get good at what you’re doing before trying to make noise.

AI has far-reaching consequences for emerging markets

Without a cost incentive to locate in the developing world, corporations will bring many of these functions back to the countries where they’re based. That will leave emerging economies, unable to grasp the bottom rungs of the development ladder, in a dangerous position: the large pool of young and relatively unskilled workers that once formed their greatest comparative advantage will become a liability – a potentially explosive one.

The result will be an unprecedented concentration of productive capacity and wealth in the hands of the elite AI companies, almost all of which are located in the US and China. Of the US$15.7 trillion in wealth that AI is forecast to generate globally by 2030, a full 70 per cent will accrue to those two countries alone, according to a study by consulting firm PwC.

Spotify will now let indie artists upload their own music

According to a recent report by The NYT, artists working with labels may see much smaller percentages. The report said that Spotify typically pays a record label around 52 percent of the revenue generated by each stream. The label, in turn, then pays the artist a royalty of anywhere from 15% to as high as 50%. If artists are dealing directly with Spotify, they could be making more money.

Labels suggested that they could retaliate against Spotify for overstepping. The NYT had also said. They may do things like withhold licenses Spotify needs for key international expansions, like India, or not agree to new terms after existing contracts expire. They could also offer more exclusives and promos to Spotify’s rivals, like Apple Music, which has surged ahead in the U.S. and is now neck-and-neck here with Spotify for paid subscribers.

A music upload feature also means artists who own their own rights could break out big on Spotify if they catch the attention of playlist editors – something that Spotify now makes it easier for them to do, as well. In addition, having indies upload music directly means Spotify could better compete against Apple Music by attracting more artists and their fans to its platform.


Apple’s neural engine = Pocket machine learning platform

If you have followed many of the posts I’ve written about the challenges facing the broader semiconductor industry, you know that competing with Apple’s silicon team is becoming increasingly difficult. Not just because it is becoming harder for traditional semiconductor companies to spend the kind of R&D budget they need to meaningfully advance their designs but also because most companies don’t have the luxury of designing a chip that only needs to satisfy the needs of Apple’s products. Apple has a luxury as a semiconductor engineering team to develop, tune, and innovate specialized chips that exist solely to bring new experiences to iPhone customers. This is exceptionally difficult to compete with.

However, the area companies can try with cloud software. Good cloud computing companies, like Google, can conceivably keep some pace with Apple as they move more of their processing power to the cloud and off the device. No company will be able to keep up with Apple in client/device side computing but they can if they can utilize the monster computing power in the cloud. This to me is one of the more interesting battles that will come over the next decade. Apple’s client-side computing prowess vs. the cloud computing software prowess of those looking to compete.


Tim Cook reveals in interview that the Chinese consumer is different because they don’t carry the burden of the desktop era

China has not experienced the so-called stage of the desktop Internet, but directly embraced the mobile Internet. Therefore, Chinese consumers do not have the burden of the desktop Internet era. This explains to some extent why China’s mobile payment share is so high. In other countries, the mobile payment process is much slower. In fact, they just have no more attempts.”

Perhaps Apple’s delay in advancing Macs and angering the pro community comes from this deep seated attitude that it’s a “burden” holding back the advancement of their iOS agenda.

The best company you’ve never heard of

With no true competitive threats, wide-moat commercial real estate data provider CoStar Group is a borderline monopoly. The other companies in the space are predominately small startups focused on crowdsourcing data. These companies can’t replicate the intangible assets from the vast cost and effort associated with compiling the data the company offers to its customer base.

Given the importance customers place on the underlying data, CoStar also keeps competitors at bay with a switching cost moat source. It’s just too risky to switch sources. Strong platform effects found throughout CoStar’s product offerings earn the company a network effect moat source, too.

The company continues to increase its coverage and boasts that it covers every building in the country, widening the gap between itself and its fragmented competition. The firm recently established itself as a leading provider of rental data with its acquisitions of Apartment Finder and Apartments.com. CoStar is only 30% penetrated in its target market for apartments, so we see room for growth in this area.

Moreover, CoStar is only 15% penetrated in the broker community and 7% penetrated with institutional investors, two groups we can see the firm going after. As several investments are integrated and benefits are realized, we project CoStar’s economic profit to steadily increase over the next several years, reflecting our positive moat trend rating.

Here’s why Yelp and Grubhub could keep rising

“Grubhub is in the early stages of enabling the shift to online of the still offline dominant restaurant takeout businesses and driving the improved consumer experience that comes with it,” they wrote. About “90% of delivery and pickup orders still come from offline, making the phone book, print out menus and walk-ins the number one competitor to Grubhub and its peers.”

How early is the shift? “We estimate Grubhub has about 40% market share of the third-party online delivery/pickup industry which itself we estimate has a 4% penetration of the $250 billion restaurant takeout industry,” they wrote. “Its early mover and scale advantage—about 85,000 restaurants on its platform in 1,600 cities—has allowed Grubhub to offer, in our view, the best consumer value across its competitors.”


Why Yelp could rise 200%

If we can introduce ourselves to those advertisers with a good ‘til canceled $300, $400 a month, $10, $20 a day kind of service proposition, what we’re finding is it really opens up our sales funnel. It makes our product more competitive in the marketplace. It allows us to get into third-party sales channels that we haven’t been in before. And we’re now kind of one quarter into it and we had this quarter, the first quarter, about 140% as many new or net customer additions in this quarter as we’ve had in any prior quarter and kind of 2x the run rate that we’ve normally seen when we were selling the term contract. And, now, we move to the non-term contract.

In the long-term, our tests and our analysis all show that the LTV of a cohort of advertisers that we bring in today will be quite a bit higher. And what we’ve seen in our tests is that we continue to sell the sort of long and strong loyal long-term advertisers under the new pricing model just as we always have, but on top of that we’re introducing ourselves to a lot more new customers along the way

Yelp is in the early days of elevating the consumer experience by expanding the number of transactional features such as Request-A-Quote from a home service professional or book a restaurant reservation or spa appointment. Request-A-Quote lead volume grew 27% from the first to the second quarter of 2018 and topped 5.5 million delivered requests in the second quarter. During that same short timeframe, revenue attributable to Request-A-Quote increased by more than 50%, surpassing a $35 million annual run rate at the end of the second quarter. The company is not yet fully monetizing Request-A-Quote, which we believe could accelerate free cash growth even further. We like finding misunderstood, yet promising, and free embedded call options within the companies we invest in and hope Request-A-Quote proves to a second material avenue for free cash per share growth.


GGV Capital: Unpacking Xiaomi’s IPO

Instead of paying for users, Xiaomi actually gets paid at least 5% gross margin through hardware to get users…it’s a very different model from almost any other internet services model out there. So if this is sustainable, and to make sure this is sustainable is to have a lot more hardware products out there that the middle class can buy, and use that portfolio of hardware devices to get paid for acquiring users, so that internet services can scale thereafter…There’s definitely elements of Muji and Uniqlo in a different field for Xiaomi, there’s definitely elements of a Costco model of subscription plus very low cost to make sure more products are affordable by the rising consumer class, there’s definitely elements of Amazon in there as a platform to sell many products and being very focused at delivering a superior experience…

If we look at the number of internet users coming online, the next 1.5bn internet users coming online between now and 2030, most of that growth will come from the 74 countries that Xiaomi is in already. So when people ask me if Xiaomi is coming to the US or not, they completely miss the point, the growth is coming from the existing countries that Xiaomi’s already in…

Xiaomi has over 18 apps, each with monthly active users of over 50mn. It also has 38 apps, each with over 10mn MAUs. In aggregate, it did over 1.5bn RMB in internet services revenue in 2017, which already puts them as a top 25 internet services only company in the world. The most popular [app] that people know is probably Xiaomi Video, which has an interesting way of becoming aggregation services. It doesn’t license content from anyone, what it does is it aggregates content from all the top Chinese video apps, each of which have already licensed the content and whenever a user clicks on a video, it takes you to the content from its partners but within the app itself, so you can have a more integrated experience. It charges advertising revenue and also subscription from the users…and they share that revenue with its partners that provide the original video content. So, it can focus on providing the most comprehensive collection of content to the user, at the same time, so far, they don’t have to spend much money on acquiring the content itself.”


Tesla, software and disruption

It’s pretty clear that electric disrupts the internal combustion engine, and everything associated with it. It’s not just that you replace the internal combustion engine with electric motors and the fuel tank with batteries – rather, you remove the whole drive train and replace it with sometime with 5 to 10 times fewer moving or breakable parts. You rip the spine out of the car. This is very disruptive to anyone in the engine business – it disrupts machine tools, and many of the suppliers of these components to the OEMs. A lot of the supplier base will change.

We will go from complex cars with simple software to simple cars with complex software. Instead of many stand-alone embedded systems each doing one thing, we’ll have cheap dumb sensors and actuators controlled by software on a single central control board, running some sort of operating system, with many different threads (there are a few candidates). This is partly driven by electric, but becomes essential for autonomy.

Tesla’s first bet is that it will solve the vision-only problem before the other sensors get small and cheap, and that it will solve all the rest of the autonomy problems by then as well. This is strongly counter-consensus. It hopes to do it the harder way before anyone else does it the easier way. That is, it’s entirely possible that Waymo, or someone else, gets autonomy to work in 202x with a $1000 or $2000 LIDAR and vision sensor suite and Tesla still doesn’t have it working with vision alone.

‘Flash Boys’ exchange IEX wins first listing

The U.S. corporate-listings business, in which companies pay fees to an exchange for services tied to being the primary venue for the company’s stock trading, has for years been an effective duopoly of the NYSE and Nasdaq. A third big exchange group, Cboe Global Markets Inc., lists exchange-traded funds and its own shares, but hasn’t made a bid to attract other companies. NYSE parent Intercontinental Exchange Inc. and Nasdaq earned a combined $684 million from listings last year, according to the two exchange groups.

“We at Interactive Brokers understand that being the first listing on a new exchange may entail certain risk, but we think that individual and institutional customers who own and trade our stock will receive better execution prices and that advantage will outweigh the risk,” Mr. Peterffy said in a press release announcing the move.

Because of China’s outsized workforce, the density of automation usage lags other countries: 68 robots per 10,000 industrial workers, compared with 631 bots for every 10,000 manufacturing staff in South Korea, the global leader in automation. Singapore, Germany and Japan all have higher densities of automation than China. China wants to more than double that usage density to 150 for every 10,000 workers by 2020. To do so would require massive amounts of government help.

‘Made In China 2025’: a peek at the robot revolution under way in the hub of the ‘world’s factory’

A skilled factory worker earns about 36,000 yuan a year in wages and benefits in China’s poorer provinces and second-tier cities, away from the coast. Total remuneration can exceed 60,000 yuan in cities nearer the coast and along the eastern seaboard, like in the Pearl River and Yangtze River deltas. A 200,000 yuan robot that can do the job of three humans can recoup its capital cost in 22 months in central provinces, or in a little over a year in coastal cities. In the face of rising prices pressures for labour, energy and rents, such a cost advantage would be attractive to many manufacturers.

China’s total spending on research and development is estimated to have risen 14 per cent last year to 1.76 trillion yuan, according to the Ministry of Science and Technology.

“Among the thousands of so-called Chinese robotics companies – including robot and automated equipment producers as well as those who only provide automation integration solutions – only about 100 firms could mass produce the main body and core components of high-end and middle-market industrial robots, such as servo motors, robot controllers and speed reducers,” he said. “We lack original research and have already tried to catch up by copying advanced technology. But neither technology-related mergers and acquisitions nor copycat [production] can close the gap in the short term.”

He said many domestic robotics manufacturers were still developing the traditional core parts of robots, like servo motors, robot controllers and speed reducers. But these parts would not be the core components of the future, he said.

Don’t take asset allocation advice from billionaires

One of the best ways to stay out of trouble with your finances is to focus all of your energy on your own circumstances and ignore what other people say or do with their money. Not only will it likely save you from making a grievous financial error but it will also make you happier. Constantly comparing yourself or your portfolio to others can be exhausting.

This is how to raise emotionally intelligent kids: 5 secrets from research

Don’t argue the facts. Feelings aren’t logical. You wouldn’t expect the new employee to know how to find the bathroom and you shouldn’t expect a child to know how to handle emotions that, frankly, you still have problems dealing with after decades of experience. Don’t immediately try to fix things. You need to establish you’re a safe ally before you can solve anything. Understanding must precede advice, and, just as with adults, they decide when you understand.

The critical distinction Gottman realized is that it’s important to accept all feelings — but not all behavior. If you skip immediately to problem-solving, the kid never learns the skill of how to deal with those uncomfortable emotions. You want to use “empathetic listening.” Get them to talk. Help them clarify. Validate their feelings (but, again, not necessarily their behavior). They need to feel you really understand and are on their side.

Providing words in this way can help children transform an amorphous, scary, uncomfortable feeling into something definable, something that has boundaries and is a normal part of everyday life. Anger, sadness, and fear become experiences everybody has and everybody can handle. Labeling emotions goes hand in hand with empathy. A parent sees his child in tears and says, “You feel very sad, don’t you?” Now, not only is the child understood, he has a word to describe this intense feeling. Studies indicate that the act of labeling emotions can have a soothing effect on the nervous system, helping children to recover more quickly from upsetting incidents.

As we have discussed earlier, the implications of teaching a child to self-soothe are enormous. Kids who can calm themselves from an early age show several signs of emotional intelligence: They are more likely to concentrate better, have better peer relationships, higher academic achievement, and good health. My advice to parents, then, is to help your kids find words to describe what they are feeling. This doesn’t mean telling kids how they ought to feel. It simply means helping them develop a vocabulary with which to express their emotions.

In an ideal world, we’d always have time to sit and talk with our kids as feelings come up. But for most parents, that’s not always an option. It’s important, therefore, to designate a time—preferably at the same period each day—when you can talk to your child without time pressures or interruptions.

Curated Insights 2018.08.24

Tech firms account for 60% of profit margin growth in the past 20 years

The information technology sector – which contains the bulk of superstar firms – accounts for 60% of the increase in S&P 500 profit margins over the past 20 years, while the “adjacent tech” sector, comprising the health care (including biotech firms) and consumer discretionary sectors (incl. firms such as Booking Holdings and Expedia) accounts for 40% of the rise. It also means the bulk of the market – i.e., all firms ex. tech, healthcare and consumer discretionary – have seen no margin growth at all since 1998.

Dear Elon: An open letter against taking Tesla private

First, as a private company, Tesla will be unable to capitalize on its competitive advantages as rapidly and dramatically as it would as a public company, an important consideration given the network effects and natural geographic monopolies to which autonomous taxi and truck networks will submit. Second, in the private market, Tesla would lose the free publicity associated with your role as the CEO of the public company not only with the bestselling mid-sized premium sedan in the US, but also arguably in the best position to launch a completely autonomous taxi network nationwide in the next few years. Just ask Michael Dell: he wants to lead a public company once again for a reason. Third, you will deprive most of your individual investors of a security to bet on you and your strategy, ceding that opportunity to high net worth and institutional investors. Finally, if you do not take Tesla private, you will be surprised and gratified at investor reaction once they realize and understand the scope and ramifications of your long-term vision and strategies.

Thoughts on Xiaomi’s eighth anniversary and inaugural month as a public company

As of March 2018, Xiaomi already had 38 apps with more than 10 million monthly active users, and 18 apps with more than 50 million monthly active users, including the Mi App Store, Mi Browser, Mi Music, and Mi Video apps. Rather than paying search engines to acquire users, Xiaomi is essentially getting paid for acquiring users through selling its smartphones. This allows Xiaomi to have a negative CAC (customer acquisition cost) for its Internet services.

Another under-appreciated pillar of Xiaomi’s growth is its “ecosystem strategy.” Xiaomi strategically invests in many startups as well as the many Internet services providers they work with, both in China and outside of China. Companies in the Xiaomi ecosystem include SmartMi (air purifiers), Zimi (power banks), Huami (Mi bands), Chun Mi (rice cookers), and 80-plus more. Thanks to these prolific investments, you can find a wide variety of products in any Xiaomi store, from scooters to ukeleles (see below). As a result, every time consumers visit a Xiaomi store, they can find something new, and the frequency of store visits is a lot higher than typical smartphone brands, even Apple.

Ensure the price of the hardware is as low as possible so the company can grow market share and users. Sell the phones online, direct-to-consumer, bypass the middlemen, and past the enormous cost savings to consumers. Overtime, the company will monetize on Internet services.

When Yahoo! Invested in Alibaba (another GGV portfolio company) in 2005, the world had 1 billion Internet users. Now, the world has 3.5 billion Internet users. Over the last 13 years, Alibaba’s valuation increased 100 times from $5 billion to $500 billion. The fact that China was the fastest growing market for Internet users during this period, coupled with Alibaba’s amazing ability to execute, turned the company into a growth miracle. In the next 12-13 years, the world will most likely grow to 5 billion Internet users. The world’s next 1 billion Internet users that will come online in the next decade – via affordable but high-quality smartphones – are outside of the US. They are in the 74 countries that Xiaomi is already in today. Going forward, Xiaomi is very well-positioned to take advantage of the next phase of growth through selling hardware, software, and bundled Internet services, as well as by investing in partner companies in those countries.


Does Tencent Music deserve a Spotify-like valuation?

Tencent Music this year could generate revenue less than half of Spotify’s projected $6 billion. Tencent Music is profitable, which is rare in music-streaming. The firm pulled in roughly two billion yuan ($290 million) in net income last year. Spotify, in contrast, reported a net loss of about $1.4 billion last year, although nearly $1 billion of that was due to a one-time financing charge.

In terms of users, Tencent Music is way bigger than Spotify. Tencent Music operates streaming service QQ Music as well as karaoke and live-streaming music apps Kugou and Kuwo. The three services had a combined 700 million monthly users in China as of September 2017, according to Tencent Music. Tencent Music operates a fourth service, the karaoke app WeSing, which at the end of last year had more than 460 million registered users. By comparison, Spotify had 180 million monthly users and 83 million paid subscribers as of June, the company has said. But Spotify’s ratio of paid versus free users is higher than at Tencent Music, where only a fraction of its Chinese users pay for music.

The secret of Tencent Music’s profitability is virtual goods and cheap music rights. Most of its revenue comes from non-subscription services including karaoke and live-streaming services, where users can pay to send virtual gifts to performers.

Swelling clout of US corporate giants is depressing pay, analysts say

As the economic weight of a small number of highly profitable and innovative “superstar” companies has increased, workers’ slice of the pie has fallen in their industries. This may have contributed to a broader fall in labour’s share of income that has been particularly noticeable in the US since the beginning of the 2000s. At the same time, corporate profitability has surged to record highs. 

Goldman Sachs analysts say rising product and labour market concentration has imposed a drag of 0.25 percentage points on annual wage growth since the early 2000s. They also stress, however, that America’s dreary productivity growth is a bigger problem.

ARK Disrupt Issue 138: GPUs, crypto, fintech, mobility, and disease

Turing will be able to perform graphics, deep learning, and ray tracing operations simultaneously, a first for any processor. The Turing GPU can perform 10 billion operations per second, enabling ray tracing in real time. In addition, it is capable of 125 trillion deep learning operations and 16 trillion graphics operations per second. Nvidia and other chip companies rarely dedicate hardware to a specific algorithm in the absence of a large market opportunity. Nvidia posits that the $2,000 Turing ray tracing GPU will target 50 million artists and designers globally. A 10% hit rate would create a $10 billion market, nearly matching Nvidia’s annual revenue today.

Because 98% of all genetic diseases are polygenic, that is involving more than one gene, the clinical utility of whole genome sequencing (WGS) is taking on new importance. To date, roughly two million whole human genomes have been sequenced. If DNA sequencing costs continue to drop by 40% per year, the number of whole human genomes sequenced should increase at 150% rate per year. As a result, genome-wide association studies should power poly-epigenetic models of disease and result in molecular diagnostic tests which introduce more science into health care decision-making.

Why battling bugs is a booming business, and may be getting bigger

Preventing pest infestations—or mitigating them after the fact—is particularly important for restaurants, hotels, and hospitals. Not only can regulators impose heavy fines or shut down businesses that violate health ordinances, customers who encounter a bug-infested business may shame them on social media. “In the age of customer review apps such as Yelp, businesses are well-aware that a customer report or, worse, photo of a pest infestation can be shared around the internet within minutes and potentially damage their brand,” says Zhu. With reputations at stake, businesses in the food and beverage, hospitality, and health care sectors are especially inclined to hire a pest control company promptly when faced with an infestation. In fact, many commercial customers schedule routine treatments to prevent potential infestations, providing pest control companies with a recurring revenue stream.

The companies best positioned to thrive in this environment are those with access to sufficient capital to acquire or open new locations. Operating an extensive branch network confers a number of competitive advantages, including the opportunity to generate greater brand recognition through cost-effective advertising and the ability to operate with lower average costs due to economies of scale. In recent years, consolidation has been intense in North America, which is still home to about half the world’s pest control companies. In fact, four of the 100 largest pest control companies in the US were acquired in May 2018 alone, two of them by US-based Terminix, and one each by European firms Rentokil and Anticimex.

Despite modern pesticides and the efforts of tens of thousands of companies, pest control remains a Sisyphean task. “It’s easy to kill bugs, but it’s much harder to keep them from coming back,” Zhu says. For the foreseeable future, the bedbugs will continue to bite—and demand for professional pest control services should continue to grow.

Litigation finance offers investors attractive yields

Funds that invest in litigation are on the rise. In the past 18 months some 30 have launched; over $2bn has been raised. Last year Burford Capital, an industry heavyweight, put $1.3bn into cases—more than triple the amount it deployed in 2016. Lee Drucker of Lake Whillans, a firm that funds lawsuits, says he gets calls weekly from institutional investors seeking an asset uncorrelated with the rest of the market—payouts from lawsuits bear no relation to interest-rate rises or stockmarket swings.

Returns are usually a multiple of the investment or a percentage of the settlement, or some combination of the two. Funders of a winning suit can expect to double, triple or quadruple their money. Cases that are up for appeal, where the timespan is short—usually 18-24 months—and the chance of a loss slimmer, offer lower returns. New cases that are expected to take years offer higher potential payouts.

As funders compete for high-quality investments, opportunities in new markets arise. Bentham IMF, a litigation funder based in New York, has joined Kobre & Kim, a law firm, to set up a $30m fund for Israeli startups to pursue claims against multinationals—for example, over trade-secret violations. A burgeoning secondary market is likely to develop further, allowing investors to cash out before long-running suits are closed. Burford recently sold its stake in an arbitration case concerning two Argentine airlines for a return of 736%. Such mouth-watering profits should keep luring capital into the courtroom.

Network-based businesses will disrupt all sectors of the economy

Networks are even more powerful because their foundations are even stronger. Large corporations leveraged mass production, mass distribution, and economies of scale. Networks leverage mass computation, mass connectivity, and network effects. Because computation and connectivity improve at exponential rates, the owner of a network has insurmountable advantages over the owner of a traditional corporation.

Corporations believe that bits enhance atoms. Networks recognize that bits are the new capital and atoms are the new labor.

Dragon quest

China now has over 100 cities with populations topping one million, compared to the entire continent of Europe which has a paltry 34. Ever heard of Zhengzhou? Don’t worry if not, it’s a tier two city in Henan province that only just makes it into China’s top 20, yet it has a bigger population than the whole of Denmark. Expressed another way, China already has more millennials than the US has people.

China is of course the world’s second biggest economy and poised one day to reach the top, but consider this: if its per capita wealth were to catch up with that of Hong Kong’s, then its resulting GDP would not just surpass the United States’ today, but triple it. This is more simply reflected in the fact that each year approximately 35 million Chinese enter the middle and affluent classes. No wonder multinationals around the world are flinging everything they have at the country.


China reaches 800 million internet users

The U.S is estimated to have around 300 million internet users. The number of internet users in China is now more than the combined populations of Japan, Russia, Mexico and the U.S., as Bloomberg noted. The new statistic takes internet adoption in the country to 57.7 percent, with 788 million people reportedly mobile internet users. That’s a staggering 98 percent and it underlines just how crucial mobile is in the country.

Jakarta, the fastest-sinking city in the world

It sits on swampy land, the Java Sea lapping against it, and 13 rivers running through it. So it shouldn’t be a surprise that flooding is frequent in Jakarta and, according to experts, it is getting worse. But it’s not just about freak floods, this massive city is literally disappearing into the ground.

“If we look at our models, by 2050 about 95% of North Jakarta will be submerged.”

It’s already happening – North Jakarta has sunk 2.5m in 10 years and is continuing to sink by as much as 25cm a year in some parts, which is more than double the global average for coastal megacities. Jakarta is sinking by an average of 1-15cm a year and almost half the city now sits below sea level. The impact is immediately apparent in North Jakarta.

There is technology to replace groundwater deep at its source but it’s extremely expensive. Tokyo used this method, known as artificial recharge, when it faced severe land subsidence 50 years ago. The government also restricted groundwater extraction and businesses were required to use reclaimed water. Land subsidence subsequently halted. But Jakarta needs alternative water sources for that to work. Heri Andreas, from Bandung Institute of Technology, says it could take up to 10 years to clean up the rivers, dams and lakes to allow water to be piped anywhere or used as a replacement for the aquifers deep underground.

We all have it now

Think about that. It took 7 months for the biggest volcanic explosion in the last 10,000 years, one that affected the global climate and killed twice as many people as any other volcanic explosion in recorded history, to become news. If the same event were to happen today, we could have someone tweeting it within minutes and we would probably have video footage online within the hour. This is possible because of the democratization of information. We all have it now. Historically, having an informational edge was worth something. Being faster or having better access meant making more money. Not anymore.

This is where we are. Only those using advanced quantitative techniques have any chance of exploiting anomalies in the data. The rest of us will need to do something else. We went from a world of privileged access to information to a world where a single tweet can change everything. A world where anyone can break the story, anyone can get the data, and anyone can be a media company. If, as Brendan Mullooly points out, today’s edges are tomorrow’s table stakes, what does that leave the typical investor to do? The answer lies in a maxim from Jim O’Shaughnessy: you must arbitrage human nature.


Buyback derangement syndrome

Investors generally do not spend the money paid out in buybacks on champagne bubble baths or other forms of consumption. Rather, they reinvest it in other stocks and bonds. Buybacks thus facilitate a movement of capital from companies that don’t need it to those that do. That’s how markets are supposed to work.

Yet another claim is that much of the market rise over the last few years has been from buybacks. The numbers don’t bear this out. The direction is plausible, as researchers have found that share prices do tend to increase—by around 1%—when buybacks are announced. Several explanations have been offered for this positive reaction including that investors see repurchases as a signal that management thinks shares are undervalued, and that investors cheer when management returns cash to shareholders rather than, perhaps, wasting it on “empire building.” These explanations are behavioral effects at the margin.

Indexers will cause the next stock market crash?

My Bloomberg colleague Eric Balchunas points out that during the 2008 credit crunch, the money flows were into index funds and exchange-traded funds; more than $205 billion was put into these funds while active funds experienced $259 billion in outflows. In other words, the 57 percent sell-off of U.S. equity markets during the financial crisis gives us a good idea how passive indexers will behave when markets crash: they become net buyers while active funds become net sellers.

Beyond the 2008 crash, we have seen several market corrections since 2009. As my colleague, Michael Batnick observed, from May to October 2011, the Standard & Poor’s 500 Index fell about 20 percent. Again, between May 2015 and mid-February 2016 the S&P 500 fell about 14 percent. Other indexes, such as the Russell 2000 fell even more. And what happened? Passive index funds continued to gain market share at the expense of actively managed funds.

Which raises the question: Just who was “cruelly exposed” in those corrections? By all lights, it looks like it was the actively managed funds.

Curated Insights 2018.04.29

Amazon shareholder letter 2017

In the very first lesson, the coach gave her some wonderful advice. “Most people,” he said, “think that if they work hard, they should be able to master a handstand in about two weeks. The reality is that it takes about six months of daily practice. If you think you should be able to do it in two weeks, you’re just going to end up quitting.” Unrealistic beliefs on scope – often hidden and undiscussed – kill high standards. To achieve high standards yourself or as part of a team, you need to form and proactively communicate realistic beliefs about how hard something is going to be – something this coach understood well.

The football coach doesn’t need to be able to throw, and a film director doesn’t need to be able to act. But they both do need to recognize high standards for those things and teach realistic expectations on scope. Even in the example of writing a six-page memo, that’s teamwork. Someone on the team needs to have the skill, but it doesn’t have to be you. (As a side note, by tradition at Amazon, authors’ names never appear on the memos – the memo is from the whole team.)

How China is buying its way into Europe

We analyzed data for 678 completed or pending deals in 30 countries since 2008 for which financial terms were released, and found that Chinese state-backed and private companies have been involved in deals worth at least $255 billion across the European continent. Approximately 360 companies have been taken over, from Italian tire maker Pirelli & C. SpA to Irish aircraft leasing company Avolon Holdings Ltd., while Chinese entities also partially or wholly own at least four airports, six seaports, wind farms in at least nine countries and 13 professional soccer teams.

Importantly, the available figures underestimate the true size and scope of China’s ambitions in Europe. They notably exclude 355 mergers, investments and joint ventures—the primary types of deals examined here—for which terms were not disclosed. Bloomberg estimates or reporting on a dozen of the higher-profile deals among this group suggest an additional total value of $13.3 billion. Also not included: greenfield developments or stock-market operations totaling at least $40 billion, as compiled by researchers at the American Enterprise Institute and the European Council on Foreign Relations, plus a $9 billion stake in Mercedes-Benz parent company Daimler AG by Zhejiang Geely Holding Group Co. chairman Li Shufu reported by Bloomberg.

Is Google cheap?

According to Net Market Share, Google has around 82 per cent of the entire online search market. That figure includes China, where they are banned. Bing has around 5 per cent of the pie so, if the 3 trillion figure for Search holds true, Microsoft’s competitor processes 6,022 searches per second, versus Google’s 96,450.

Our readers may also point out Alphabet’s dependence on advertising revenues, a historically cyclical business which is an easy tap to turn off for many corporations in economic downturns. That being said, one could easily counter by mentioning the good ship Alphabet’s serene sail through the currently stormy waters of the wider advertising world. Or the fact that there are very few alternatives in terms of audience reach.

We have not even accounted for Google’s famed ‘Other Bets’ line — a collection of misfit, moonshot investments including self-driving software Waymo, health-data laboratory Verily Sciences and Alphaville favourite, smart-city planner SideWalk Labs.

Open, closed, and privacy

To focus on simply Google and Facebook, though, is to miss how much other data collection is going on: ad networks are tracking you on nearly every website you visit, your credit card company is tracking your purchases (and by extension your location), your grocery store is tracking your eating habit, the list goes on and on. Moreover, the further down you go down the data food chain, the more likely it is that data is bought and sold. That, of course, is as open as it gets.

First, it is even more unlikely that a challenger to either will arise without meaningful access to their proprietary data. This, to be fair, was already quite unlikely: the entire industry learned from Instagram’s piggy-backing on Twitter’s social graph that sharing data with a potential competitor was a bad idea from a business perspective.

Second, Google and Facebook will increasingly be the only source of innovations that leverage their data; it will be too politically risky for either to share anything with third parties. That means new features that rely on user data must be built by one of the two giants, or, as is always the case in a centrally-planned system relative to a market, not built at all.

Third, Google and Facebook’s advertising advantage, already massive, is going to become overwhelming. Both companies generate the majority of their user data on their own platforms, which is to say their data collection and advertising business are integrated. Most of their competitors for digital advertising, on the other hand, are modular: some companies collect data, and other collect ads; such a model, in a society demanding ever more privacy, will be increasingly untenable.


Facebook beats in Q1 and boosts daily user growth to 1.45B amidst backlash

Zuckerberg says one of his biggest regrets is that Facebook didn’t get to shape the mobile ecosystem because the company was still small when iOS and Android launched. That’s why Zuckerberg is adamant about Facebook having a major role in the future of virtual reality and augmented reality, which he sees as computing platforms of the future.

Global recorded music revenues grew by $1.4 billion in 2017

Global recorded music revenues reached $17.4 billion in 2017, up from $16 billion in 2016 — an annual growth rate of 8 percent. Streaming revenues in particular have contributed to this growth, and were up 39 percent year-over-year to reach $7.4 billion, or 43 percent of all revenues. But perhaps the biggest story of all is the growth of artists without labels. With 27.2% year-on-year growth this was the fastest growing segment in 2017.

Investing and business lessons from Aileen Lee (Cowboy Ventures)

Venture investors are looking for large addressable markets. How big is the market? What is the problem that you’re trying to solve? Who’s on your team? And how relevant is the team to that problem? What is the product that you’ve built, if you have built something? Or what do the wireframes look like? What kind of traction or feedback have you gotten from the market in terms of whether people are going to like the product, or whether they do like the product? What does the financial model and the economic model look like? What are you going to do with the money?” “What is the mission and vision of the company? Venture investors are looking for a big mission and vision that’s quite ambitious and that can be backed up by, ‘Here’s where we want to be and here’s how we’re going to get there over time. This is what we want to get done the next 12 months or the next 18 months.’

If you don’t attack a big market, it’s highly unlikely you’re ever going to build a big company. Great markets make great companies. We’re never interested in creating markets – it’s too expensive. We’re interested in exploiting markets early. I like opportunities that are addressing markets so big that even the management team can’t get in its way.

Why is China treating North Carolina like the developing world?

It’s about 50 percent cheaper to raise hogs in North Carolina than in China. This is due to less-expensive pig-feed prices and larger farms, but it’s also because of loose business and environmental regulations, especially in red states, which have made the U.S. an increasingly attractive place for foreign companies to offshore costly and harmful business practices.

How?

The market is all about discounting and expectations. It always has been and it always will be.

On January 31, 2006, Google Inc. announced its financial results for the fourth quarter of 2005: revenues up 97%, net profit up 82%. It’s hard to imagine how such phenomenal growth could be bad news. But Wall Street’s analysts had expected Google to do even better….Google’s stock fell 16% in a matter of seconds, and the market in the shares had to be officially halted. When trading resumed, Google, whose stock had been at $432.66 just minutes earlier, was hammered down to $366…Google earned about $65 million less than Wall Street had expected, and in response Wall Street bashed $20.3 billion off Google’s market value.

Basis—the “stable” cryptocurrency with $133 million invested—explained

Basis coins won’t be directly backed by dollars or any other asset. Instead, the Basis blockchain will attempt to adjust the supply of Basis coins over time to maintain a peg to the dollar, much as foreign central banks expand and contract their own money supplies to maintain a stable currency value.

The more consequential change is the addition of a third asset class called bonds. When the value of Basis coins falls, the system creates new bonds and sells them for Basis coins. Each bond has a face value of one Basis coin (and hence $1), but investors can acquire them at a market-determined discount.

Then, during a subsequent expansion, the system pays back these bondholders before paying anything out to shareholders. Bondholders get their money back in a first-in-first-out order, with the oldest bond being repaid first.

In effect, buying a bond amounts to making a bet that the demand for coins will rebound in a timely fashion. The less confident the market is that this will happen, the steeper the discount—a bond might sell for 0.8, 0.5, or even 0.2 Basis coins—and the greater the potential profit.

Kids worldwide spend less time outdoors, and then need glasses

Eyeglass sales are expected to double globally between 2012 and 2026, and the amount of time people are spending indoors may be a leading cause. By 2050, half of the global population, or almost 5 billion people, are projected to be nearsighted, up from a quarter, or 1.4 billion, in 2000.

Interestingly, however, while outdoor time helps to prevent nearsightedness, it doesn’t seem to affect its progression once it develops. The same recent summary suggests that the rapid rises in Asia are related in part to outdoor time: “The limited questionnaire data available suggests that the time that children spend outdoors is lower in the developed countries of East and Southeast Asia.”

Curated Insights 2017.12.31

Google Maps’s Moat

In other words, Google’s buildings are byproducts of its Satellite/Aerial imagery. And some of Google’s places are byproducts of its Street View imagery…so this makes AOIs a byproduct of byproducts. Google is creating data out of data.

With “Areas of Interest”, Google has a feature that Apple doesn’t have. But it’s unclear if Apple could add this feature to its map in the near future. The challenge for Apple is that AOIs aren’t collected—they’re created. And Apple appears to be missing the ingredients to create AOIs at the same quality, coverage, and scale as Google.

And as we saw with AOIs, Google has gathered so much data, in so many areas, that it’s now crunching it together and creating features that Apple can’t make—surrounding Google Maps with a moat of time.

Google likely knows what’s inside all of the buildings it has extracted. And as Google gets closer and closer to capturing every building in the world, it’s likely that Google will start highlighting / lighting up buildings related to queries and search results.

Apple to hit $1 trillion in market value in 2018

Today, Apple has an estimated 900 million customers. Many are buying services that include music streaming, movie rentals, applications, online storage, extended warranties, and digital payments. Apple’s recent purchase of Shazam, a service for identifying music clips, shows how Apple can add features to subscription services like Apple Music. Growing 23% in the past fiscal year, services account for 13% of Apple sales—and an estimated 20% of gross profit.

IPhone generates 60% of Apple’s revenue; there are an estimated 800 million active devices that provide a vast and growing base for services. A recent UBS survey of smartphone users in five key countries shows that retention rates have been climbing and stand at 85% for iPhone, versus 71% for Samsung and 78% for phones that use Android software. In other words, switching services isn’t common, but when it occurs, Apple generally wins.

Another upside source got less theoretical this past week with the passage of a sweeping corporate tax cut. Apple sits on more than $250 billion in cash and investments held overseas as a tax dodge, about a fifth of the total for all U.S. companies doing likewise. To bring that money home for dividends or stock buybacks, it would have had to pay the top corporate tax rate of 35%. The new law cuts the top rate to 21%; imposes a mandatory, one-time 15.5% tax on overseas cash and equivalents; and switches to a territorial tax system to reduce offshore avoidance.

For shareholders, the cake is the tax savings; the icing is that Apple loses its incentive to hold cash overseas. The second helping of cake with icing is that Apple has already booked enough to cover anticipated tax charges. Epoch’s Pearl reckons Apple could get a mid-single digit boost to ongoing earnings from the lower tax rate, and as much as a 7% increase from bringing home cash and buying back stock.

 

The near future of electric cars: Many models, few buyers

Electric cars—which today comprise only 1 percent of auto sales worldwide, and even less in the U.S.—will account for just 2.4 percent of U.S. demand and less than 10 percent globally by 2025, according to researcher LMC Automotive. But while consumer appetite slogs along, carmakers are still planning a tidal wave of battery-powered models that may find interested buyers few and far between.

Magna International Inc., for example, the largest auto supplier in North America, is having vigorous debates over whether to add capacity to tool up for electric cars when its executives don’t see much demand for them over the next eight years. The company predicts EVs will only grow to between 3 percent and 6 percent of global auto sales by 2025, said Jim Tobin, chief marketing officer at the Canadian company.

Industry executives convinced drivers will abruptly exit their internal combustion engine vehicles in favor of electrics may find themselves too overzealous, with LMC forecasting gasoline-powered engines will still make up about 85 percent of U.S. new car sales in 2025. But that shift could accelerate as electrified vehicles reach price parity with gasoline-powered cars, which Bloomberg New Energy Finance predicts will happen by 2029 or sooner for most models.


Riders in Alphabet’s driverless car will be insured by startup Trov

So-called usage-based insurance, which changes in response to the customer’s needs or actions, has become popular among both traditional insurers and startups like Trov. A common example is car insurers’ use of devices to track a driver’s behavior and then offer discounts for good driving.

Trov CEO Scott Walchek said what appealed to Waymo was Trov’s ability to measure risk in what it calls “micro-durations.” The company asked if Trov’s technology for only assessing risk during periods when its users swiped on their coverage could be repurposed to cover passengers for the length of a ride in a Waymo vehicle. Trov developed a solution, Mr. Walchek said.


Kuka plans for robot domination in China and your garage

China is the world’s largest and fastest-growing automation market. Sales of robots in China, which amount to about one-third of the global demand, grew by 27 percent last year, compared to just 12 percent in Europe and 8 percent in the Americas, according to the International Federation of Robotics. With 68 robots per 10,000 Chinese manufacturing workers, far fewer than the 189 in the U.S. and 631 in South Korea, there’s room for growth and rising factory wages are powering more automation. “We want to become number one in China,” says the Kuka executive, noting that their market share for robots last year was around 14 percent (that puts it among the top three suppliers).

Along with its push into non-auto industrial robots, Kuka aims to leverage Midea’s sales networks and company connections to start producing consumer-focused robots too. The companies are jointly building a large industrial park near Guangzhou that will have R&D, technology development, a robotics training center, and critically, a production facility. “We are increasing capacity. That is the first step,” says Reuter. “For Kuka, the park will be a very, very important step towards becoming number one.”

Driver shortage sends truck haulage rates higher

The shortage of drivers comes as the industry looks to a future with self-driving, autonomous trucks. There are currently more than 3m truck drivers on the road in the US, with the job offering one of the highest levels of pay for non-college graduates. Last year, the median salary for drivers with three years’ experience tipped $57,000, according to the National Transportation Institute.

However, Mr Leathers warned that buzz around the technology could discourage people from working as drivers. “The last thing I can afford, and we can afford, is for our rhetoric on driver-assist or autonomous to get out in front of reality and [for us to] start seeing enrolments and interest in the field drop before the technology is ready to really engage,” he said.

Which nation does the world trust most? (Hint: Follow the Dollar)

America’s current 24 percent share looks much diminished compared with 30 percent in 2000 but about the same as the 26 percent share in 1980. It’s simple to cherry-pick a start date that makes American decline look bad, but the reality is that China is gaining global economic share at the expense mainly of Europe and Japan. America is a tested economic superpower, having survived 21 recessions and a Great Depression since 1900. China remains untested, having suffered not one outright recession since its modern renaissance began around 1980. It has yet to be seen just how well China will weather such a test, which is inevitable for any large economy.

Nearly 90 percent of bank-financed international transactions are conducted in dollars, a share that is close to all-time highs. When individuals and companies borrow from lenders in another country, they increasingly borrow in dollars, which now account for 75 percent of these global flows, up from 60 percent just before the global financial crisis in 2008.

In a dollar world, most countries are happiest when the dominant currency is cheap and plentiful. A strong dollar raises the cost of borrowing, which slows global economic growth and has often triggered debt crises in the emerging world. A weak dollar has the opposite effect, which is why the weakening of the dollar this year offers more evidence of its dominance: Partly as a result, the world is enjoying an unusually broad recovery encompassing every major economy.

Instead, the renminbi has gained no ground as a reserve currency and probably won’t as long as China’s financial markets remain largely closed, underdeveloped and subject to government meddling. History also suggests that economic size alone will not be enough to propel China to financial superpower status. From 1450 through the late 1700s, the leading reserve currency was held by smaller countries — first Portugal, followed by Spain, the Netherlands and France. These nations were all major trading and military powers with credible financial systems, but not one was the world’s largest economy. Throughout those centuries, the leading economy was primarily China. It never gained the advantages of having the leading reserve currency because, then as now, its financial system lacked credibility.


China’s $100 billion smartphone maker

Oppo makes $14 of operating profit apiece, Vivo $13 and Xiaomi a mere $2, Counterpoint reckons. That is of course minimal compared with the $151 per device they estimate Apple Inc. made, and $31 at Samsung Electronics Co.

Oppo and Vivo appear to be much more pure-play hardware businesses. This is risky, because customer loyalty is fickle and any margins they make leave them open to price competition. But at least they’re banking profits today instead of hoping for some future “economies of ecosystem” that may never come.


Chinese populism lives in a video app

According to one analysis, 70 percent of Kuaishou’s users earn less than $460 per month, 88 percent haven’t attended university, and a majority live in less developed parts of China. Kuaishou has managed to attract them by forgoing celebrity videos and promoted content in favor of algorithms that recommend items that other users like. It’s an approach that leaves users with the impression (if not the reality) that their videos have a fighting chance to be viewed. And that attracts users who know they’d be wasting their time posting content to sites focused on fashion, luxury and city life.

Indeed, even as other video platforms see their growth stunted by Chinese government oversight and brutal competition, Kuaishou expands. Today it’s the fourth largest social-media platform in China, behind WeChat, QQ and Sina Weibo. That’s why it’s a smart bet for investors like Tencent Holdings Ltd, which pumped in $350 million in March 2017. China’s smaller cities already produce 59 percent of China’s gross domestic product and retain significant commercial and cultural pull, both for those who still live in them and for the hundreds of millions who’ve migrated away.


Chinese consumers now rule the world. Get used to it

As China’s expansion increasingly depends on consumption, its growth will be not only more internally driven, but also less resource- and credit-intensive. Imports of premium goods and services will increase. This market will be more and more attractive to multinational firms and investors.

One significant byproduct: China’s politically-sensitive trade surplus will continue to shrink and the current account surplus, the broadest measure of capital flows, might contract even more. This, in turn, may exert downward pressure on the yuan.

China to overtake U.S. economy by 2032 as Asian might builds

The report by the Centre for Economics and Business Research in London sees India leapfrogging the U.K. and France next year to become the world’s fifth-biggest economy in dollar terms. It will advance to third place by 2027, moving ahead of Germany.

In 2032, three of the four largest economies will be Asian — China, India and Japan — and, by that time, China will also have overtaken the U.S. to hold the No. 1 spot. India’s advance won’t stop there, according to the CEBR, which sees it taking the top place in the second half of the century.

Also by 2032, South Korea and Indonesia will have entered the top 10, supplanting the Group of Seven nations of Italy and Canada.