As contactless payments become more popular in the US, card issuers should beware of Apple Card

Costs and benefits of a credit card from an issuer perspective

Issuing a credit card is a business and hence, it comes with risks, expenses, revenue and hopefully profits. A credit card issuer’s revenue comes from three main sources: interchange, fees and finance charge. Finance charge is essentially interest income or the interest on outstanding balance that users have unpaid at the end of a cycle. Fees include late fees, cash advance fees or annual fees, just to name a few. Interchange is what an issuer receives from merchants on a transaction basis, according to a rate agreed in advance and usually dictated by networks such as Visa or Mastercard. There are a lot of factors that go into determining what an interchange rate should be, but for a consumer card, it should not be higher than 3% of a transaction’s value.

As an issuer thinks about which credit card product to issue, it needs to balance between the benefits of the card, the expenses and the profitability. For instance, nobody would be $100 in annual fee for a credit card that has a standard 1.5% cash back without any other special benefits. That product wouldn’t sell. Likewise, an issuer would flush money down the toilet if it issued a card with a lot of benefits such as a Chase Sapphire without a mechanism to make money on the other side, like an annual fee. The art of issuing a credit card is to make sure that there is something to hook the users with and a way to make money.

The dynamic between a brand and an issuer in a Cobranded credit card agreement

In addition to having cash back or rewards on generic categories such as Dining, Grocery or Gas, an issuer can appeal to a specific user segment by having a special benefit dedicated to a brand. That’s why you see a Co-branded credit card from Walmart, Southwest, Costco or Scheels. These brands work with an issuer to slap their brand on a credit card. What do the parties in this type of partnership get in return?

From the Brand perspective, it offers to an issuer Marketing Assistance and an exclusive feature to appeal to credit card users. To the fans of Costco, a Costco credit card with 5% cash back; which should be very unique, is an enticing product to consider. Why saying no to extra money when you already shop there every week without it already? Moreover, a Brand can also be responsible for rewards at or outside their properties. For instance, Costco can pay for rewards at Costco stores or on Costco website or purchase outside Costco or the combination of all. It varies from one agreement to another.

From the Issuer perspective, it has to compensate the Brand in the form of Finder Fee, which is a small fee whenever there is a new acquired account or a renewal, and a percentage of purchase volume; which you can consider it a tax. The issuer, of course, has to take care of all the operations related to a credit card such as issuing, marketing, customer service, security, regulatory compliance, fraud, you name it. In return, issuers have an exclusive benefit to appeal to credit card prospects. They will also receive all the revenue, net the compensation to the Brand, as I described in the first section. Therefore, the longer a customer stays with an issuer and the more he or she uses the card, preferably revolves as well, the more profitable it is for the issuer.

BrandIssuer
What to offer– Marketing Assistance & brand appeal
– Rewards
– Finder fee (a fixed fee for every new account and/or a lower fee for every renewal
– In some cases, issuers fund rewards as well
– All operational needs related to a credit card
– A percentage of purchase volume
What to gain– Finder fees
– A tactic to increase customer loyalty
– A percentage of purchase volume from the issuer
– An exclusive feature to appeal to credit card users
– Revenue, net all the compensation to the Brand

Typical credit cards

Based on my observations, there are three main credit card types on the market which I assign names for easier reference further in this article:

  • The Ordinary: cards that have no annual fees, but modest benefits such as 1% or 1.5% cash back on everything. These cards are usually unbranded
  • The Branded: these cards are Co-Branded credit cards that are issued by a bank, but carry a brand of a company. These cards can come with or without an annual fee, but they reward most generously for purchase at the company’s properties, such as 3-5x on every purchase. Then, there is another reward scheme for a generic category such as 2-3x on dining/gas/grocery/travel. Finally, there is a 1x on everything else
  • The Premier: these cards are often accompanied by a high annual fee. To make it worthwhile for users, the issuers of these Cards hand out generous benefits and/or signing bonus. For instance, a Chase Sapphire user can get 60,000 points after spending $4,000 the first 90 days.

All the three types usually work well with mobile wallets and have a delay on when rewards are posted (usually it takes a cycle). This delay isn’t particularly enticing to users because when it comes to benefits, who would want to wait?

Apple Card

Apple Card is a credit card issued by Goldman Sachs and marketed by Apple. The card has no fees whatsoever, but comes with some special features:

  • An expedited application process right from the Wallet app on iPhones
  • Instant cash back in Apple Cash – no delay
  • Native integration with Apple Pay
  • 3% cash back on all Apple purchases
  • 12-month 0% interest payment plan for select Apple products
  • 2% on non-Apple purchases through Apple Pay
  • 1% on non-Apple physical transactions through a chip reader or a swipe

Without the 2% cash back with Apply Pay, Apple Card would very much be for Apple purchases only. But because there is such a feature and Apple Pay is increasingly popular, I think Apple Card should be something that issuers need to beware. Let me explain why

With the increasing popularity of Apple Pay, Apple Card should not be taken light

Last month, the Department of Justice filed an anti-trust lawsuit against Google. Interestingly, the lawsuit said that 60% of mobile devices in the US were iPhones. That says much about how popular Apple’s flagship product is. With the easy application process and the native integration into iPhone and Apple Pay, Apple Card has a direct line to consumers. Once a consumer contemplates buying an Apple product, it’s impossible not to think about getting an Apple Card and reaping all the benefits that come with it. With the existing iPhone users, the extensive media coverage and the marketing prowess of Apple will surely make them aware of Apple Card. Therefore, other issuers are on a back foot when it comes to acquiring customers from iPhone user base. However, most people have multiple cards, so one can argue that this advantage may not mean much. To that, I’ll say: fair enough. Let’s look at other aspects.

If you compare Apple Card to the Ordinary above, Apple Card clearly has an advantage. In addition to the 3% cash back on Apple purchases, there is also 2% cash back on other purchases through Apple Pay, higher than the 1.5% offered by the Ordinary. Granted, Apple Pay’s presence is a requirement, but as more and more merchants and websites use Apple Pay, it’s no longer relevant. It almost becomes a given and this advantage Apple Card has becomes more permanent. Besides, Apple Card has no fees and can issue cash back immediately after transactions are approved, compared to a host of fees and a delay in rewards from the Ordinary.

Between Apple Card and the Branded, it’s harder to tell which has the advantage. It depends on the use cases. For on-partner purchase (purchase on the brand’s properties), Apple Card has no chance here as the reward rate from the Branded is much higher: 3-5x compared to 2x from Apple Card. However, things get trickier when it comes to non on-partner purchase. If a non-on-partner purchase warrants only 1x reward from the Branded, Apple Card has an advantage here as it can offer 2x rewards with Apple Pay. If a non-on-partner purchase warrants 2x reward from the Branded, the question of which card consumers should favor more rests on these factors:

  • How much do consumers care about receiving immediate cash back?
  • Can the transaction in question be paid via Apple Pay?
  • How much are consumers willing to go back and forth in their Apple Pay’s setting?

Between Apple Card and the Premier, the comparison depends on which time frame to look at. Within the first year on book, the Premier should have an advantage. No one should pay $95 for a card and does not have a purchase plan in mind to get the coveted signing bonus. In other words, savvy users should plan a big purchase within the first 90 days to receive thousands of points. In this particular use case, the Premier clearly is the better card. However, it gets trickier after the first year on book. Without a signing bonus, users now have to determine whether it’s worth paying an annual fee any more. The usual benefits from the Premier should be better than Apple Card’s, but the high annual fee and the delay in rewards may tip the cost-benefit analysis scale to a tie or a bit in favor of Apple Card.

Given my arguments above, you can see how Apple Card, provided that Apple Pay becomes mainstream, can become a formidable competitor to issuers. Apple Card may not affect the acquisition much, but it may very well affect the purchase volume and usage of other issuers’ cards, and by extension, profitability because, as I mentioned above, issuers’ revenue come partly from interchange. In other words, Apple Card should not be taken lightly as a gimmick or a toy feature at all.

How popular is Apple Pay?

In Q1 FY 2020, Tim Cook revealed that Apple Pay transactions doubled year over year and reached a run-rate of 15 billion transactions a year. Loup Venture estimated that 95% of the US top retailers and 85% of US retail locations adopted Apple Pay.

According to a research by Pulse, in the US in 2019, there was around $1.3 billion worth of debit transactions through mobile wallet, $1.1 billion of which came through Apple Pay. This level of popularity will leave retailers and merchants with no choice, but to have Apple Pay-enabled readers; which in turn will gradually benefit Apple Card.

Image
Source: Pulse

Disclaimer: I own Apple stocks in my personal portfolio

Weekly readings – 21st November 2020

What I wrote last week

AirBnb S-1

Raving reviews on Apple’s new chip M1

Business

Digital ad spending is estimated to exceed traditional ad spending in the US this year

Amazon is about to make serious noise in the pharmaceutical industry

Intel and AMD have to talk about gigahertz and power because they are component providers and can only charge more by offering higher specifications. “We are a product company, and we built a beautiful product that has the tight integration of software and silicon,” Srouji boasted. “It’s not about the gigahertz and megahertz, but about what the customers are getting out of it.” 

Source: Why M1 matters to Apple

Technology

The Verge’s review of Apple Macbook Pro with M1 chip

What I found interesting

Republicans tend to sound the honk on the federal deficit when it’s convenient for them. Here is how BBC debunks the deficit myth

Why Obama fears for our democracy

It’s pretty heart-breaking to see what has been happening in Central Vietnam for the last few months. A Western reporter at Saigoneer courageously went there, took photos and wrote about it beautifully.

AirBnb – an outstanding success, one not as great as many thought

AirBnb recently filed its S-1 as an important step before soon going public. Finally, the curtain on one of the household names and one of the most anticipated IPOs is now pulled back a little. The filing is pretty long. I stuck through it, well most of it. Here is what I found

Background

Unless you have lived under a rock for the past 4-5 years, you should be familiar with AirBnb. It’s that website where you can book a spare room, an air mattress in somebody’s house or the entire house for a period of time. In 2007, two of the founders were trying to make more money to cover the expensive living cost in San Francisco. One time, there was a popular conference in town and all the hotels were booked. So they quickly came up with a website that could let people book for an air mattress at their place. The seed for AirBnb was planted on that day. 13 years later, they are on the verge of going public.

The problems AirBnb solves are two fold. 1/ They increase the efficiency of the travel market. Hosts, whether it’s an individual or a professional management company, have spare resources (rooms) that can be exploited while guests can have an alternative choice in addition to traditional hotels, often at a cheaper price. 2/ Trust. Guests come to stay at traditional hotels because they somewhat trust the safety there. Imagine that you are an individual host. How could you trust a stranger enough to let him or her in your apartment, let alone sleeping a few feet away from you? At its core, AirBnb operates as a middle man between hosts and guests, and facilitates the searching and booking of travel products.

Who does AirBnb compete with? Here is the list of competitors AirBnb detailed in the filing

Online travel agencies (“OTAs”), such as Booking Holdings (including the brands Booking.com, KAYAK, Priceline.com, and Agoda.com); Expedia Group (including the brands Expedia, Vrbo, HomeAway, Hotels.com, Orbitz, and Travelocity); Trip.com Group (including the brands Ctrip.com, Trip.com, Qunar, Tongcheng-eLong, and SkyScanner); Meituan Dianping; Fliggy (a subsidiary of Alibaba) Despegar; MakeMyTrip; and other regional OTAs

Internet search engines, such as Google, including its travel search products; Baidu; and other regional search engines;

Listing and meta search websites, such as TripAdvisor, Trivago, Mafengwo, AllTheRooms.com, and Craigslist

Hotel chains, such as Marriott, Hilton, Accor, Wyndham, InterContinental, OYO, and Huazhu, as well as boutique hotel chains and independent hotels

Chinese short-term rental competitors, such as Tujia, Meituan B&B, and Xiaozhu; and

Online platforms offering experiences, such as Viator, GetYourGuide, Klook, Traveloka, and KKDay.

Source: AirBnb ‘s S-1

The order of this list should tell you which AirBnb considers their fiercest rivals. Not only do those incumbent OTAs offer a marketplace for room nights at traditional hotels, but they also have their own homestay marketplace offerings, similar to what AirBnb is. With an esteemed competition like this, how well has AirBnb performed in the past few years?

Incredible growth in the past 5 years

According to the filing, the number of Nights and Experiences (like a virtual cooking session or a tour to a sight nearby) booked grew at a CAGR of 46% from 72 millions in 2015 to 327 millions in 2019. Meanwhile, the gross booking value (the dollar amount of all Nights and Experiences booked) grew 47% every year from around $8 billion in 2015 to $38 billion in 2019. Those are impressive numbers. Put it this way, in the first 9 months of 2020, 6 of which were amid Covid-19, AirBnb booked more Nights and Experiences and dollars than they did in the entire year of 2016. On this note, I wish AirBnb were a bit more transparent. I’d love to see a breakdown of booked room nights and booked Experiences. Booking.com breaks down their bookings for accommodation, flights and car rentals. I don’t see any reason why AirBnb shouldn’t do the same to help investors understand more the dynamics of their business.

Before the pandemic, AirBnb’s revenue grew 51% every year, from $919 million in 2015 to $4.8 billion in 2019. The first 9 months of 2020, despite the deadly Covid-19, saw the company book almost as much revenue as the entire year of 2017. If we look at the take-rate which is the ratio between revenue and gross bookings, it has been flat at around 11-12% every year between 2015 and 2019. The commission in the first 9 months of 2020 is 14%. Given that AirBnb pushed for virtual Experiences during the pandemic and saw their rental bookings demolished, that’s why I argue for more transparency in the way AirBnb reports their numbers. To really understand the dynamics of their business. Even at 14%, it’s still a bit lower than what Booking.com has globally on average at 15%.

Covid presents a massive challenge and a silver lining

Covid-19 is perhaps the biggest and most damaging crisis to the travel industry. AirBnb isn’t immune to it. Bookings (Nights and Experiences Booked) were up 25% and 17% year-over-year in January and February 2020, before the bottom fell off under AirBnb’s feet. Covid-19 hit. Bookings dropped by 114% and 103% in March and April, respectively. The situation recovered as folks travelled more after April, but as of September 2020, bookings were still down 28%. The decline in bookings leads to a drop in revenue in the first 9 months of 2020 of 32% YoY. Operating loss is almost 4 times bigger than the loss of the same period last year. The damage was so devastating that the company even considered not going public this year.

But why do I say that Covid-19 presents a silver lining?

Before Covid-19, AirBnb showed signs of inefficiency. After being profitable in 2018, every cost item as % of revenue increased in 2019, in comparison to 2018, resulting in the company’s operating loss of 10% of revenue. Even though it still suffers loss in 2020 due to a rise in costs, the cost mix is different. What AirBnb expensed in 2020 is mostly related to Covid-19. The growth in G&A, Operations and Product Development is offset by the decline in Marketing expense. Specifically, the company didn’t spend as much money on marketing, particular online ads as it did a year ago. In fact, for the nine months ending on September 30, 2020, only 9% of their traffic came from paid marketing channels. In an interview a few months ago, CEO Brian Chesky revealed that the company had the same booking in the US market in 2020 up to that time as they did in the same period in 2019, despite NO spending on paid marketing, to the tune of a saving of $1 billion.

Despite all the damages Covid-19 has caused the company, the pandemic looks to be an opportunity for AirBnb to recalibrate and refocus. They might have got carried away with expanding too fast without a tight control of the expenses. At least, they now learned that they could still keep the business in a good shape without wasting money on paid marketing. Whether they can apply the same lesson to other expense items remains to be seen, especially when Covid-19 is still engulfing us around the globe.

Source: AirBnb’s S-1

Moving forward, I hope that AirBnb will be more transparent with regard to the breakdown of their online and offline marketing expenses. Booking.com did a very good job on that. They have a specific section dedicated to online marketing spending while AirBnb mixes it with brand marketing; which doesn’t let investors and analysts have a true feel of how much the company spends on paid performance marketing, in comparison to its rivals.

Source: AirBnb’s S-1

Legal threats

Like many other companies, AirBnb has a couple of looming legal threats on the horizon. One significant threat comes from possible restricting local regulations. In their filing, AirBnb wrote:

For example, listings in New York City generated approximately 2% of our revenue in 2019, and when new regulations requiring us to share host data with the city are implemented, our revenue from listings there may be substantially reduced due to the departure from our platform of hosts who do not wish to share their data with the city and related cancellations. A reduction in supply and cancellations could make our platform less attractive to guests, and any reduction in the number of guests could further reduce the number of hosts on our platform.

Source: AirBnb’s S-1

To be honest, I never understand the beef between local authorities and AirBnb. If it’s about tax, then just raise taxes on the company, but I don’t fully support passing regulations that restrict its business and by extension, individual hosts that operate on its platform. Nonetheless, it’s the reality that AirBnb has to deal with. There are a host of legal issues in various forms that AirBnb is encountering. Even though they don’t necessarily threat its existence, it may harm the top and bottom lines.

The second threat comes in the form of a $1.35 billion tax bill. According to AirBnb, they were served in September 2020 with a notice that they would need to pay $1.35 billion in taxes, plus penalties and interest related to their alleged failure to pay enough of their dues in 2013. That figure can amount to 30-33% of total revenue in 2019; which is a significant sum.

My thoughts on AirBnb

AirBnb is a spectacular story in a sense that it opened up a market that had been there before. Before AirBnb, no company had been able to take homestay rentals to the level that it did. Would there have been another company that achieved the same feat? Possible, but the fact and the matter is that it is AirBnb that revolutionized this market and has grown to be a multi-billion dollar company. It warrants nothing but praise and admiration. However, from a financial perspective, the last 18 months haven’t been great. Even before Covid, AirBnb registered a loss while they should have made some profit.

At its core, AirBnb is similar to other OTAs. The difference is that while the incumbent OTAs, the likes of Booking.com and Expedia, rule the world of traditional hotels, AirBnb dominates the homestay world. Yes, the incumbents have their homestay offerings too, but is Vrbo a verb or as popular a noun as AirBnb? Not even close. While the OTA giants are making inroads into AirBnb’s territory, AirBnb also starts to have some hotels listed on their platform. I think in the future AirBnb and OTA giants can co-exist together and thrive in their respective stronghold. AirBnB understands how to manage homestay, but doesn’t have the expertise to deal with hotels, especially chains like Booking.com. On the other hand, OTAs don’t have the brand name in the homestay world like AirBnb nor the expertise.

In the near future, here is what I think will be AirBnb immediate priorities for the next one or two years

  • Recover to the pre-covid level of business. Even after travel is opened up again, it won’t be the same as it was for a while. Would travelers be comfortable in a stranger’s house without knowing if it’s clean enough? How about traveling internationally to somewhere that still struggles with Covid? Would business travel recover fast enough?
  • Deal with the legal challenges as I mentioned above
  • Get used to the scrutiny that comes with being public
  • Keep control of the costs. 2019 wasn’t a great example of cost management. Would AirBnb keep up the lesson it learned during Covid?
  • What’s next for Virtual Experiences?

In short, once travel industry recovers, however much, from this deadly pandemic, AirBnb will no doubt increase its bookings and revenue. I do have some confidence in their adapting to the new style of travel. What they will be more judged on is their profitability and that remains to be seen. 2019 wasn’t great. 2020 so far has been a year of exception because of Covid-19. Their performance on the stock market will be much affected by whether they can stay disciplined with their expenses.

I do want to make a point about my personal experience with AirBnb. The site is helpful, but it is annoying. What bugs me is that AirBnb isn’t upfront with all the fees. Once you settle on a listing for $100/night, by the time you get to the checkout page, it will be already $150/night with service and cleaning fees. It feels like you were duped, cheated or fooled. I’d much rather know all the fees up front, from the very beginning. I do believe that my experience isn’t unique. Many others share the same view on this issue. Hence, I hope AirBnb will fix it soon.

Interesting facts about AirBnb

Besides the main points above, there are a few other statistics that I think are pretty interesting.

  • As of September 2020, AirBnb had 4 million hosts over the world, 55% of who are women and 86% are outside of the US
  • In 2019, 23% of new added hosts were guests first. 50% received a booking within 4 days of becoming available and 75% within 16 days
  • During 2019, 69% of revenue came from repeat guests
  • AirBnb’s debt as of September 2020 stood around $2 billion
  • AirBnb committed to $1.2 billion for a single cloud vendor (AWS, I think) through 2024
  • Twelve months ended September 30, 2020, the average annual earning per host with at least one check-in was $7,900.
  • As of September 30, 2020, 21% of all hosts were Superhosts
  • In 2019, 68% of guests left reviews
  • Chargebacks in the year ended December 31, 2019 and nine months ended September 30, 2020 were $92 and $95 million respectively
  • By my calculation and data provided by AirBnb, their average merchant fee rate was 1.85% in 2019 and 2% in the nine months ended September 30, 2020
  • Nights and Experiences booked in the Top 20 cities made up less than 5% of the total every month
  • Nights and Experiences booked for 28 nights or longer made up between 3.5% and 6% of the total every month
  • As of December 31, 2019, 90% of all hosts were individual and 72% of bookings were with individual hosts. “Of the reviews they received in 2019, 83% of ratings for individual hosts and 75% of ratings for professional hosts were 5-star.”
  • “In 2019, the average number of guests on an Airbnb stay was 3 people, and 77% of nights were booked for entire homes”
  • “14% of nights booked in 2019 and 24% for the nine months ended September 30, 2020 were for long-term stays”

Raving reviews of M1 – Apple continues to deepen its moat

A couple of weeks ago, Apple announced their new Macbook Air and Macbook Pro with their own designed chip M1. The chip is touted to be much more powerful and power-efficient than all previous Intel chips or many chips on the market. Due to the new chip, the new Macbook Airs won’t have an active cooling system because they will not consume energy aggressively and the battery will last significantly longer, to the tune that, Apple alleged, you may get by the whole day without a charge. The same goes for Macbook Pro, except that the Pros will have an active cooling system. Since the products were available, there have been raving reviews on the Macs with M1, despite some shortcoming such as iOS apps running on the Mac, the touch bar or the quality of the camera (which nobody ever likes). Here are a few excerpts that I found really interesting

Apple’s new Macs based on the M1 system on a chip, the first Macs based on Apple Silicon, are that sort of mind-bending better. To acknowledge how good they are — and I am here to tell you they are astonishingly good — you must acknowledge that certain longstanding assumptions about how computers should be designed, about what makes a better computer better, about what good computers need, are wrong.

Some people will remain in denial about what Apple has accomplished here for years. That’s how it goes.

The M1 Macs are such better machines than their Intel-based predecessors it’s hard to believe. Apple’s battery life braggadocio is warranted. The battery just lasts and lasts and lasts. I’ve been using this MacBook Pro almost exclusively on battery power all week, doing both all my normal work and running benchmarks and performance-stressing tasks, and I can’t come close to depleting it in a full day of work. It never gets hot. In normal use, it doesn’t even get warm. Maybe, sort of, when running a fully-taxing test like the Cinebench multi-core CPU benchmark, it heats up to just past room temperature above the Touch Bar, but it bears no resemblance thermally to a taxed Intel-based MacBook Pro.

As I type this paragraph I’ve been working for just over three hours, nonstop, with the MacBook Pro unplugged the whole time, and the display as bright as I want it to be. The battery is at 80 percent. To say that it offers merely “all day battery life” would require me to work very long days.

Source: Daring Fireball

Intel and AMD have to talk about gigahertz and power because they are component providers and can only charge more by offering higher specifications. “We are a product company, and we built a beautiful product that has the tight integration of software and silicon,” Srouji boasted. “It’s not about the gigahertz and megahertz, but about what the customers are getting out of it.” 

At a human level, all of this means that you will see your system as soon as you start to flip open the screen. Your computer won’t burn your lap when doing zoom calls. And the battery doesn’t run out in the middle of a call with mom. It’s amazing what goes into making these small-seeming changes that, without many of us even realizing it, will transform our lives.

Source: Om.co

Or this hilarious and awesome review by Joanna Stern

The tech review is fair in giving credit and crap where credit and crap are due. This is to say that so far the new Macs with chip M1 look very good, true to a large extent of what Apple claimed them to be.

This brings me to my main point: with the new chip, Apple is deepening its competitive moats.

Think about it this way, here is what a competitor would need to do to compete with and usurp Apple:

  • Manufacture a slew of different hardware products like a phone, personal computers, a tablet, wireless earphones and a smart watch
  • Own the operating systems that power those physical products
  • Manage a tight integration
  • Create an ecosystem that features developers and consumers
  • Offer valuable services such as iMessage, Apple Pay, Health, Apple Pay, iBooks etc…
  • Stick to the enduring philosophy of offering incremental progress that makes consumers’ life better, instead of achieving meaningless technical numbers
  • Have a strategy and stick to it
  • Possess a world-class brand and a boatload of money
  • Run a sophisticated supply chain that spans across the globe
  • Design a great chip
  • Achieve many, if not all, listed above at the same time

Besides delivering values that customers deem worth paying for, the key to succeed in business is to do certain things better than your competition. The more things a company excels at and the more intertwined those things are, the better the outlook for that company is. In the case of Apple, it’s already hard enough to create just a phone to compete with them. Ask Samsung. It’s much harder to keep being competitive at it and try to fight other battles as well. When I look at Apple’s competitors, I don’t see the tight integration between hardware and software that Apple excels at. Google owns Android, but it is not a hardware company. Samsung can produce hardware, but it doesn’t own Android. Apple produces its hardware and owns the operating systems. It already has the coveted software-hardware integration. With the new chip, Apple takes the integration to another level. Now, the chip, the software and the hardware are tightly integrated and we can see earlier on the results of such an effort above. Granted, there are still shortcomings that Apple needs to fix, but that should be expected. There is no perfect roll-out. The next generations of products with Apple’s own chips will be even better; which should be exciting for users, but scary for its competition.

In addition to the tangible aspect, there is also an intangible element here in the mix as well. A company that wishes to emulate what Apple does needs to study how Apple is internally set up and how the long established culture is influencing its operations. You can’t go and ask Ferrari to produce a low cost car while keeping their style. On the other hand, it would be highly challenging to ask Aldi to have a store like Whole Foods. It’s not in their DNA. To be clear, the Apple way isn’t the only way to succeed in the business they are in. Depending on how you define success, there should be more than one way to achieve it, but to achieve the success at the scale that Apple has, their way is the only way so far.

For a company that wants to emulate Apple’s success, it needs to either recreate the Apple way which poses a significant challenge or to have a groundbreaking and completely different idea whose outcome is far from certain. Apple is far from perfect. I find it annoying that they ship buggy software more frequently. They tell you new operating systems work with older Macs. Trust me when I say this: they don’t always do. I had my Mac’s hard drive wiped out so that I could get rid of Catalina. I am still on Mojave because if I upgrade, I may as well buy a new computer. My friends don’t dare to upgrade their MacOS to Big Sur and the only one that did regrets it immensely. I also don’t like their pricey rip-off accessories such as a Mac cord or a wireless mouse. There are other reasons why folks are legitimately annoyed by the company. But all of their shortcomings (who among us doesn’t have one?) shouldn’t dispute the fact that Apple is one of the best run companies out there and their competitive advantages are not only already daunting to overcome, but getting bigger and bigger.

Nothing lasts forever. While I do think we should keep a powerful company like Apple honest all the time, as a business student (I am no longer in school, but never stop learning), I think we should appreciate an extraordinary achievement of a group of people who, despite all the success and $2 trillion+ valuation, keep moving forward. This is a company that is under intense scrutiny constantly and subject to standards higher than what is expected from many other businesses. They aren’t a cheat that scams investors or consumers, and I am using the word “scam” as in promising the moon but delivering nothing. No matter how one may think about it, Apple has delivered products, services and financial performance that few companies can every year since 2007. I learned a lot from this company, let’s just say, both goods and bads. Luckily, the former far outweigh the latter.

Disclaimer: I own Apple’s stocks in my portfolio.

Weekly readings – 14th November 2020

What I wrote

My reaction to Biden’s win

My thoughts on DoorDash’s S-1 filing

Business

Loup Ventures on Apple Pay

CBInsights has a long helpful piece on ByteDance, the owner of TikTok

Is advertising a new source of revenue and profit for big box retailers?

Apple’s transparency report which includes data on how often it complied with requests from authority

Technology

A couple of reviews of Homepod Mini by The Verge and WSJ

Apple executives talked to The Independent about the new chip M1 and how they were surprised at their breakthrough. Safe to say, there won’t be Macs with touchscreens any time soon.

Autonomous vehicles are hard. Really hard. Uber now wants to offload its autonomous vehicle arm to Aurora.

What I found interesting

The EU is about to relax regulations on encryption, a move that can threaten user privacy

Why Democrats lost Latinos in South Texas

Less screen time and more sleep critical for preventing depression

DoorDash picked the perfect time to go public as the business has grown amid Covid-19

DoorDash is a food delivery service which, after receiving an order, will deliver the order to the customer’s door. The service has three main stakeholders: merchants (restaurants), customers who order food and delivery partners whom DoorDash call “Dashers”. The business started in 2013 as three Asian Americans wanted to help local restaurants. The CEO, Tony Xu, migrated to the US at the age of 5 and worked in his mom’s kitchen in his earlier years. It is that background that inspired him to start this business. 7 years later, these entrepreneurs and their team are about to reap the fruits of their labor after the business has grown leaps and bounds and is on the verge of going public. Let’s take a look at how DoorDash makes money

How DoorDash makes money

This is the graphic DoorDash included in its S-1 to explain where its revenue comes from

Source: DoorDash

As you can see, DoorDash generates its revenue from charging customers fees which include typically include delivery and service fees, as well as taking a cut from the merchant side. In 2018, DoorDash introduced DashPass, a subscription that is worth $9.99/month. The subscription will remove per-order delivery fees and reduce service fees for customers. At the same time, DoorDash hopes this subscription will help increase the stickiness of the service and keep the customer churn low.

DoorDash has gone a long way and become increasingly…less unprofitable

According to its S-1 filing, DoorDash grew its market share from 17% in January 2017 to a market-leading 50% in the US in October 2020, besting other contenders such as Uber Eats, Grub Hub and Postmates. Compared to the same period last year, DoorDash tripled its order count and the Marketplace Gross Order Value (dollar amount of all orders) in the quarter ended September 2020. In Q3 2020, the delivery company generated more than $7.2 billion in GOV and received 236 million in total orders. In the last two years, an average order on DoorDash has stayed largely consistent at $30. Since these numbers were recorded after the introduction of DashPass, I wonder what has been the effect of the subscription on the average ticket.

The company grew not only on the top line, but also on the profitability side. Gross margin has steadily increased from 23% in Q1 2019 to a sweet 53% in Q3 2020. Contribution margin, which represents the result when you divide the difference between revenue and variable costs by revenue, went up from -74% in Q1 2019 to 24% in Q3 2020. In other words, for each order, DoorDash didn’t had to spend as much on acquisition and promotion as it had had. In fact, DoorDash reported that existing customers on the platform have increasingly made up the majority of the business, reaching an overwhelming 85% of the total GOV. This is a very good sign for DoorDash as it shows customers love what they sell and stick around more. In business, we often say it costs 5-6 times more to acquire a new customer than to retain one.

While its competitor Uber Eats never sniffs profitability, DoorDash achieved the feat in Q2 2020. While its revenue grew almost 7 times between Q1 2019 and Q3 2020, DoorDash’s operating loss has shrunk 6 times during the same period. To highlight the increased efficiency of the business, Sales & Marketing, which is usually the biggest expense for a multi-sided platform like DoorDash, has been lower than Cost of Revenue for 4 straight quarters through Q3 2020 and stood at 33% in the lastest quarter.

Source: DoorDash

As the business grows, so does DoorDash’s legal trouble. The company spent a few pages only on legal lawsuits, most of which concern its labeling Dashers as independent contractors, instead of full-time employees. The company repeatedly warns investors in its filing about regulations which could adversely harm its business. That’s because if DoorDash has to change its classification, it would mean the company has to pay higher wages and employee benefits. California introduced AB5, a legislation that would force gig economy companies like DoorDash to alter its operating model and classify workers as employees. However, DoorDash got a victory when Californians passed Proposition 22, which essentially stayed AB5. However, I don’t think the legal challenges will end there for DoorDash and they are something that prospective investors should pay attention to.

My thoughts on DoorDash

Clearly, things have been going well for DoorDash. The past few months have seen a substantially positive impact by Covid on the business. More order, more business and higher odds at profitability. Even though DoorDash indicates that their customer base makes up only 6% of the US population, I am pretty doubtful whenever companies cite the Total Addressable Market. First of all, not all the US population will use DoorDash. Second of all, the company has fierce competition from the likes of Uber Eats, Postmates and Grub Hub. I am confident that DoorDash will grow its top line in the next year or two, but the magnitude that the company hints in its filing is not really realistic. On the other hand, DoorDash can grow internationally. The company recently debuted in Canada and Australia. There is no doubt it will make inroads into Uber Eats’ market share, but at the same time it will require more resources from the management.

Recently, we have seen DoorDash strike partnerships that are not food related such as the one with Walgreens to deliver drugs and health products. In the future, I expect to see DoorDash develop to be a delivery platform, not just a food delivery machine. The logic is simple: the more orders there are, the more revenue DoorDash can generate and the happier it can keep customers and drivers. I didn’t see this piece much from the filing, but don’t be surprised if it comes up more in the next couple of years.

Additionally, some people wonder the sustainability of this model as restaurants have to relinquish a significant amount of margin to DoorDash. In the example above, restaurants have to give up 18% ($4 out of 22%) to the delivery service, while it was reported that in some case, the commission could go up to 30%. While it is indeed concerning as some restaurants may resist working with DoorDash and lawmakers may intervene, the fact and the matter is that a commission rate of 15%-20% seems to be the industry standard. Plus, restaurants may find that developing their own delivery muscle and marketing ability won’t be that much cheaper. As we are going through the worst phase of this pandemic so far and the weather is getting colder and colder, diners may favor delivery to in-dining, a huge tailwind for DoorDash.

Some interesting facts from DoorDash’s S-1

  • Dashers’ age ranges from 18 to 55. 45% of Dashers are women
  • As of September 30, 2020, there are 5 million DashPass subscribers
  • DoorDash has 390,000 merchants, 18 million customers and 1 million Dashers on its platform
  • “In 2019 alone, merchants as a whole experienced 59% year-over-year same store sales growth”
  • DoorDash’s list of 3rd party partners include AWS, Stripe, Salesforce, Twilio, Wavefront, Snowflake, Olo, Salesforce, Twilio, Wavefront, Snowflake, Olo and Google Maps

Joe Biden won the 2020 Presidential Election

The excruciating suspense is finally over. Major media outlets just called the race in Pennsylvania and, as a consequence, the whole election for Joe Biden. Crossing over the magical threshold of 270 electoral votes, Joe Biden and Kamala Harris will be the next President and Vice President of the United States.

To be honest, I can’t put into words how I felt right now. In 2016, I came to the US, hoping that I could build a better life for myself. It took a massive beating on November 8th, 2016 when Donald Trump won the election because he had been campaigning on the hard-line anti-immigration policies. The past four years was nothing but easy. On multiple occasions, the administration put forward proposal after proposal to make it harder for immigrants like me to find a job and to be on our path towards citizenship. Imagine that you worked hard for years towards a goal and only had it yanked away because somebody woke up one day with a new idea. There is no price tag to put on the uncertainty and worry that immigrants like me have had to endure during Trump’s administration so far.

Then I watched the Election Day on Tuesday. I knew it would be a tight race, but I didn’t expect it to go the way it did. Trump outperformed the expectation. I watched in horror what was unfolding on my laptop. I almost cried. I was in disbelief on how so many could vote for Trump after all he has done and in complete shock as to what to do if Trump actually won. I couldn’t work effectively the rest of the week as I was following closely every update from the states. I don’t think any of my friends could either. The mood was better on Wednesday when Biden’s chance became clearer and it was pretty much obvious that Biden would win the election, barring official confirmations. After a few days of brutal suspense, finally the moment was here. The best I can say is a huge relief mixed with hope.

Whatever happens in the next four years remains to be seen, but one thing almost certain is that Biden will restore decency, certainty in policies, reputation among our allies, humanity and respect to the American institutions; all of which have been severely torched and evaporated by Trump and his enablers in the last few years. To be clear, it won’t be easy. The country is more divided than ever before. The pandemic is rampant with a new daily case tally every day north of 100,000. The people need help. And the Republicans in Congress, particularly the Senate, already signaled that they would not let Biden appoint who he likes. The road won’t be smooth and easy, but at least now that there is light at the end of the tunnel. At least now America has a chance at redemption.

There is something I want to call out here. This week, the whole world has been consumed with the US election. You don’t see this phenomenon with elections from UK, Canada, China, Russia or Germany. Even the people that don’t have anything directly at stakes paid attention to this election and followed every update. That’s the power of America. That’s how the world views America. Even though some may say that only America proclaims itself as “beacon of hope”, there is some truth to that. There is a reason why millions yearn to come to America every year. I recently read this about comedian John Oliver voting in America for the first time

“Standing in line, I thought maybe this will be it and I didn’t feel it,” he continued. “Giving them my name and getting the ballot, I didn’t feel it. Scanning it into the machine and the machine saying, ‘Your vote has been counted,’ I nearly burst into tears. That is the truth. My eyes got misty. I thought, ‘I don’t know if I can cry in a voting station.'”

Source: People.com

I completely feel him. I am not a citizen yet, but I almost cried after the news broke. I have stopped writing this a few times, to check the news if this is all true. Despite all its faults, America is loved by many. I love this country even when I criticized it before. That’s why it has hurt so much the past four years under this administration. And I don’t think I am even close to being alone in this

The nightmare is about to end. We can start rebuilding this country. On top of that, we’ll have the first ever female Vice President and the first African & Asian American Female Vice President at that. It’s hard to believe that almost 250 years after its foundation, this is the first time it happened in America, but I’ll take it.

Time for celebration. At least there is finally some great news in 2020. Have a nice weekend everyone!

Weekly readings – 7th November 2020

What I wrote

Some local propositions that voters approved. I personally support these proposals and think that many people will

Business

Learning from Quibi

32% of those who switched from Android to iOS did it because of Apple’s perceived security benefits to Android.

The rise of cloud in Europe – an excellent write-up by Bessemer Venture Partners

TikTok partners with Shopify whose sellers can now create TikTok content straight from their seller dashboard

Amazon’s exclusive store for luxurious brands – Luxury Stores

A profile of Discord, a communications application that looks a lot similar to Slack

Brave, a privacy-focused browser, reached 7 million Daily Active Users

Walmart+ vs Amazon Prime. As of right now, 17% of Americans subscribe to Walmart+ at least for free trials. The key, though, is how many Walmart can convert to loyal paid subscribers

Once examples of European startup scene, Monzo and Revolut have seen their valuation drop since the start of Covid

Jack Ma spectacularly tanked his company’s IPO

Technology

A brief history of PDF as the de facto file format for official documents

If you care about privacy, here is a list of alternatives to Google products

What I found interesting

The New Yorker’s profile of Signal founder

Have trees planted systematically or grow naturally?

Why do tunnels in America cost more than in other countries?

Approved progressive measures on ballots that folks should know more about

I don’t think there is anything else in the world that has captured our attention today and yesterday more than the Presidential race. Not the Senate races. Not the House of Representatives races. Not even Covid. Everything else has to take a backseat, but there are measures or propositions on the ballots that I personally support and think should be called out more. I hope you will find them helpful.

Florida voters approved a significant raise in the minimum wage.

I am not a huge fan of Florida, but this move is awesome! Florida voters approved the raise of the minimum wage from $8.56 per hour to $15 per hour from now till at least 2026. For every working individual, that’s double what they are getting paid now. Imagine the relief that these hard-working people and their family will have from this measure. Critics of this measure would tell you that it’s hurting their business and keeping the wages low would stimulate business and the trickle down economics. Have you ever known the trickle down economics work before? Me neither! If business owners can retain more profits at the expense of employees, there is no way that they will let it go. That’s not in the human nature. The only way to improve the livelihood of workers is to make the minimum wage high enough. Is $15 per hour sufficient? I don’t know. But it sure is a hell lot better than $8.56/hour.

The City of Portland in Maine banned the use of facial recognition, imposed a rent control and raised the minimum wage

The City of Portland in Maine also lifted the minimum wage to $15/hour, but it also did two other things: ban the use of facial surveillance technology and impose more rental protections for renters. In addition to limiting an annual increase in rent to the rate of inflation, the measure also mandates the creation of an oversight body that handles rental disputes and shortens the length of unofficial leases. All of these are legislations truly by and for citizens. It’s not uncommon to hear about renter abuses by landlords. If you read any rental agreements, the clauses embedded in those agreements aren’t particularly in the best interest of renters. Although it likely won’t solve all potential issues, the new approved measure is a step in the right direction and tips the scale a bit more in favor of renters.

Paid and Medical Leave in Colorado

It’s still mind-blowing to me that paid and medical leave isn’t universal in America. But the state of Colorado took a step in the right direction by approving the measure that requires companies to pay workers 12 paid weeks for childbirth and family emergencies which include medical occasions. There is not much else to elaborate on this. I’ll just let State Senator Faith Winter take it from here:

I am happy for the workers of Colorado. The new law will ensure that mothers don’t have to return to work mere days after giving birth, she said, and that cancer patients can take time to heal.

Source: CPR

Data privacy expansion and voting rights restoration for folks on parole in California

California’s voters approved a proposition called Prop 24 built on the California Consumer Privacy Act. The proposition will allow consumers an ability to limit how businesses can use their data such as race, location and health information. There will also be a new body that oversees the adoption of the law and the new proposition. In my opinion, our privacy is our right. Companies such as Internet Service Providers shouldn’t be able to exploit our own data and sell it to advertisers without our consent. Sadly, that’s what is happening across the country. Along with other egregious violations of our privacy. Hence, I do think this is a good proposition to have in effect.

Another approved proposition is the restoration of voting rights for folks on parole. Called Proposition 17, it gives people back the rights to vote after they serve their sentences. I mean, everyone makes mistakes. Just because there is a stain in a person’s record should rid you of one of his or her basic human rights, especially in a democracy. It baffles me so much that there are many states in the country where folks are deprived of their voting rights simply because they made a mistake in the past. Well, the way to integrate them back into a society is firstly to let them be a human, with human rights. It’s reported that the proposition will help 50,000 Californians have their voting rights back. 50,000!

Find other ballot measures here

Weekly readings – 31st October 2020

What I wrote last week

Though AWS slowed, Amazon didn’t

My thoughts on Apple after their latest quarter and the last fiscal year

Business

Take-away lessons during the first 6 months of a Shopify employee. I find the read helpful, particularly the importance of understanding decision-makers’ attitude

From McDonald’s to Google: How Kelsey Hightower became one of the most respected people in cloud computing

Expensify CEO emailed his 10 million customers and asked them to vote for Biden. Though there are some who disagreed with him, they appreciated the openness. This is an example of how it should be done

Technology

Google announced Google One, a bundle that includes a VPN service, 2T of storage on Google Gmail & Drive and other benefits. Currently only available to Android devices in the US

Waymo made an unprecedented move to detail their behind-the-scene work on autonomous vehicles, including crashes and near-misses

What I found interesting

A story of a Uighur at a Chinese concentration camp

A study conducted by a Swedish university concluded that the Republican party has moved towards autocracies for the last 20 years

Brazil’s plan to exploit Amazon responsibly is in danger

A very eloquent, balanced and well-written endorsement for Joe Biden from The Economist

Just a hard breaking story from a Covid survivor in Texas