Thinking about Netflix

Netflix is an amazing business story. It is a $228 billion company as of this writing and a household name in plenty of countries around the world. Talk to people who like to study businesses and many of them will recommend: look at Netflix. The rise of Netflix offers valuable lessons that business students or executives can take inspiration from. With their latest earnings call last week as a backdrop, I want to take some time to look at the streaming service and put down some thoughts.

The Bull Case

This quarter’s numbers weren’t the best that Netflix has had to offer. Overall, its revenue increased 19% compared to a tough comparison of last year buoyed by Covid-19 and stay-at-home restrictions. Operating margin was 25%, almost 300 basis points higher than the same period last year. In total, the streamer had 209 million subscribers as of Q2 2021. Net paid additions stood at 1.54 million with 2/3 coming from Asia Pacific, even though North America market lost almost half a million subscribers. In the last two years, Netflix added on average 27 million subscribers, on par with 2017 and 2018. Given the competition for screen time, it’s remarkable that they manage to add 27 million subscribers a year while regularly increasing prices. One can argue that it’s testament to the health and competitive advantages of the business.

One big advantage that Netflix has over other streamers is unit cost. As the first mover in this market, Netflix’s big subscriber base enables it to stretch content cost over subscribers more than competitors can. The advantage is likely to persist for a while. On the earnings call, management emphasized a few times how Netflix has low penetration in numerous markets. Given how they have added 27 million subscribers per year in the last four, the track record indicates that they will continue to add to their advantages.

Recently, Netflix made several moves suggesting significant changes/additions to their business. Back in June, the company announced Netflix Shop, an online store where customers can buy branded merchandise that is inspired by Netflix’s originals. The company also hired a new Head of Podcasts and a Vice President of Game Development. I can see the rationale behind these developments. Netflix’s originals have a legit following which would be a waste if the company didn’t try to capitalize with merchandise and retail sales, like what Disney does with its IP. Should they build amusement parks like Disney? I don’t think it’ll be wise to spend billions of dollars on physical attractions. First, that’s not what Netflix is good at. They don’t have yet some of the legendary brands/stories such as Marvel, Mickey Mouse like Disney does. Second, the company was long criticized and mocked as Debtflix because of its regular holding and increasing of debts. I am not sure that any news on spending a ton of capital on parks to replicate Disney’s model would be positively received. Of course, having an online store isn’t the same as offering experiences like Disney World or Disneyland does, but it serves as a great and capital-light complement to Netflix’s core business.

On the earnings call, the management team insisted that at least for now, they don’t see these new initiatives as profit pools. Rather, they are meant to support the core subscription business and add values for customers. They said that games would be available to subscribers at no additional cost. The initial position on podcasts and games is consistent with the Netflix brand: great at storytelling, customer-led & subscription-focused operation. I don’t know if game & podcast are the best way to keep customers engaged and lower churn, but it’s a positive sign to see the leadership add more depth to the business.

Well, I would say none of them. That is they’re not designed to be because — but I’ll draw two distinction. There’s things that our consumers love it in our service. So Shonda Rhimes’ future work, we are very confident of. Video gaming, we’re pushing on that, and that will be part of our service, so unscripted, all those things. So think of that as making the core service better. So lots of investment but not a separate profit pool. It’s enhancing the big service that we have.

And then, there’s a number of supporting elements, consumer products, various shopping where we’re really trying to grow those to support the title brands to get our conversations up around each of the titles so that the Netflix service becomes must-have. So they’re not a profit pool of any material size on their own, but they are helping — the reason we’re doing them is to help the subscription service grow and be more important in people’s lives, so I would say really, we’re a one product company with a bunch of supporting elements that help that product be an incredible satisfaction for consumers and a monetizing engine for investors.

Source: Netflix

When asked about Netflix’s position on sports, Ted Sarandos, the Co-CEO of Netflix, said that they preferred leveraging their storytelling excellence in sports to competing for the rights to broadcast. As an investor, I wholeheartedly welcome that position. Their sport documentaries such as Drive to Survive, or Michael Jordan’s The Last Dance are huge hits to the audience. They reflect the ability to tell stories, some of which are completely new and can be found nowhere else. These content pieces are also not littered with ads, something that gels very well with Netflix’s brand positioning. I don’t see any reason why they should stop. What this shows is that Netflix’s management is, at least on this front, prudent with their content investments and knows what their leverages are.

Look, I think we’ve — you’ve pointed it out, but our success with the sports-adjacent properties, like the F1 Drive to Survive, Deaf U and certainly the Michael Jordan doc, those are all examples, I think, of the platform and what it can do to build enthusiasm on what is already viewed to be an enormous business. Drive To Survive expanded the audience for Formula 1 racing pretty dramatically, in both in live ticket sales and TV ratings and merchandise sales, all those things. And I think that that can be applied as long as the storytelling is great. So what’s good about this for us is that we could apply those same kind of creative excellence to the storytelling behind those sports, the personalities behind those sports, the drama that happens off camera.

Look, I don’t know that those sports suffer from being underdistributed, so I don’t know that we would bring that much to them. And just to be clear, I’ve reiterated this a lot, but I’m not saying we’ll never say never on sports. It’s just what is the best use of about $10 billion. And I think that’s what it’s going to cost to invest meaningfully in big league sports.

And that pricing has only gone up since I started saying that, so I believe that that’s likely to hold. But again, I don’t think it’s because those other sports are niche because they’re underdistributed and that we could bring a lot to them. Our fundamental product is on demand and advertising free, and sports tends to be live and packed with advertising. So there’s not a lot of natural synergies in that way, except for it happens in television.

Source: Netflix

Overall, there is a strong case to be made about Netflix’s competitive advantages. If you love to have a management team sticking to their guns and philosophy, so far, Netflix’s has done a pretty good job at that.

The Bear Case

Up to now, Netflix’s revenue is only from subscriptions. To grow revenue, there are only two ways: add more subscriptions or raise prices. Netflix has regularly raised prices over the past few years and management reported that these prices don’t negatively affect churn. However, I wonder how far they can take that approach. A recent survey showed that almost 40% of cancellations on Netflix were because consumers didn’t perceive they got the bang for their bucks. Netflix bulls can argue that it’s just one survey and doubt the legitimacy of the methodology, but we all have friends or family members who cancel Netflix because it got too expensive. Given the pool of alternatives that consumers have on the market, I don’t imagine Netflix has a lot of leeway left to continuously raise prices. In addition, there is something to be said about the quality of content on Netflix. Don’t get me wrong, they have plenty of good movies and shows. But I feel like there are more inferior shows than good ones. When that happens, folks like those surveyed below feel that they don’t get enough value in exchange for their money.

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Source: Andrew Freedman

I think Netflix is capable of producing great podcasts. There are synergies between what they have been doing and podcast creation. However, I am less confident in their prospect at games. Games are very challenging. Just ask Google. They shut down their initiative to develop 1st party games for Stadia. I am not saying that just because Google couldn’t crack that code doesn’t mean Netflix wouldn’t. It just means that I have some reservation over what Netflix can do for games. While using games to reduce churn and engage subscribers is a great idea, there are a lot of folks who watch Netflix and can’t care less about games, myself included. As I mentioned above, games require a serious investment without a guarantee for success. A big investment for a subset of subscribers, it gives me some concern and reservation. But of course, you don’t know what works unless you try. I look forward to how this initiative pans out.

On the earnings calls, Netflix management usually paints a rosy picture of lowering churn and increasing engagement. I don’t blame them. That’s what they are supposed to do. However, there are data points that tell a different story. Take engagement. Netflix spent millions of dollars on marketing Army of The Dead just to have a lower number of people sampling the show than Spenser Confidential. On a side note, I have a heightened level of caution whenever I read into Netflix’s metrics. They used to count people who accidentally had a show automatically previewed in their engagement. That’s pretty much not true. They did change the criteria for the engagement metric to be more relevant but does watching a show for a couple of minutes is the same as watching the whole show? In the past, I once wrote about how Netflix deceptively used Google Trends data to make it look like The Witcher was more popular than The Mandalorian on Disney+. These episodes don’t necessarily put me at ease whenever I have to look at reported numbers from Netflix.

While Netflix lost half a million subscribers in North America this quarter, The Information reported that Disney gained subscribers in the same period. Now, the article from The Information hasn’t been confirmed, verified or validated yet, so the jury is still out on its accuracy. But if what is reported holds, even though having an apple-to-apple comparison between the two streamers is always a challenge, Netflix undeniably has competition and in fact, is feeling it. Yet, you often hear Netflix’s management downplay its competition. While it can be good for a company to focus more on its operations than on others, the fact that the management doesn’t straightforwardly acknowledge the level of cut-throat competition baffles me. Combined with the ambiguity of metrics mentioned above, I wonder how much Netflix doesn’t want us to know about the impact of competition.

Summary

As great a business as Netflix is, it still has some concerning aspects to iron out. Admittedly, I am dominantly bullish on Netflix like many others. However, while I have some concerns as laid out above, I often see Netflix bulls blindly optimistic about the company’s outlook, citing their unit cost advantage as invincible. I mean, Amazon has 175 million Prime members use Prime Video. Apple has 600 million subscribers that they can stretch content cost over. Disney in the past couple of years already has amassed more than 100 million subscribers. Netflix’s advantage is real and their management is capable, but in this highly competitive space, future success is not a given. In fact, Netflix needs to be on their A game to stay ahead. I think by trying new initiatives, they are doing that, in their own way. Whether these initiatives succeed remains to be seen, but at least they are not sleeping on their success.

Weekly reading – 24th July 2021

What I wrote last week

My review of From Junk To Gold

Business

An excerpt from an upcoming book on what went wrong with WeWork. This should be talked about in business schools as one of the examples of why egos and delusional ambition can lead to disasters. These guys are richer than many many people on Earth and have more money than most folks can earn in a lifetime. Nonetheless, it’s staggering to see their silly actions.

The Verge has an interesting interview with Mark Zuckerberg. The interview touches upon a lot of things but there are two that I want to quickly highlight here. Mark talks about how people shouldn’t expect that there is no transgression on his company’s platforms. That is always bound to happen. Instead, what people should expect is that Facebook is there to police the platform when it happens and puts in place integrity systems to deter bad demeanor. Secondly, I think the idea of interoperability is great, but not 100% perfect. That’s just how it is in life. There are always advantages and disadvantages to everything. Apple’s business model doesn’t involve interoperability that these guys advocate for, but in terms of net benefits to the society, has Apple been a positive force? I’d say so.

If you are not familiar with BNPL market, here is a good BNPL industry report

FICO Score’s Hold on the Credit Market Is Slipping. Not great news for the parent company of FICO score.

Grab taps Adyen to extend BNPL offering across Southeast Asia

What I found interesting

Master’s Degrees Are the Second Biggest Scam in Higher Education. My experience is that Master’s Degrees often still hold values because hiring companies value them. There are some exceptional programs that are worth the investment, but many aren’t. It’s crazy to think that so many people got into a huge debt to get something that is far less valuable

Giant tsunami from dino-killing asteroid impact revealed in fossilized ‘megaripples’. I can’t even bring myself to imagine what a 1-mile high tsunami looks like. It’s simply impossibly terrifying.

Lost world revealed by human, Neanderthal relics washed up on North Sea beaches

Stats that may interest you

20% of Americans think the U.S government uses Covid-vaccines to plant a microchip in their bodies. Use this info however you want

Lifetime emissions for an EV in Europe are between 66 and 69 percent lower compared to that of a gas-guzzling vehicle, the analysis found. In the US, an EV produces between 60 to 68 percent fewer emissions. In China, which uses more coal, an EV results in between 37 to 45 percent fewer emissions. In India, it’s between 19 to 34 percent lower.

Source: The Verge

Book review: Junk to Gold – From Salvage To The World’s Largest Online Auto Auction

I picked up this book after seeing a few folks on Twitter recommend it. This is more or less an autobiography of Willis Johnson, the founder of Copart, one of the two largest online auto auction in the world. My overall experience from reading this book is positive because I like the content and its reasonable length.

Many books tend to be filled with a lot of junk, no pun intended, and longer than what they should be. This book is straight to the point and can be easily finished on a weekend. Content wise, it can teach readers many meaningful business lessons without shelling out tens of thousands of dollars on college. For example, Willis was a visionary because he and his son-in-law repeatedly invested handsomely in IT ahead of anybody else. They worked with California DMV to leverage computers to register cars instead of manual paperwork. This move sped up the selling process and improved customer experience. Then, they spent $3 million, a big sum at the time, on Copart Auction System (CAS) to allow online bidding for all of their yards; which nobody else did at the time. When the Internet started to gain popularity, Johnson and his right-hand son-in-law hopped on the trend and built out Copart’s online presence. In hindsight, these initiatives seemed rather obvious, but from my own experience working in the U.S, there are many companies that are reluctant in investing in IT, my current employer included.

Willis Johnson is a shrewd businessman. He knew that in order to grow his business, he had to generate more than one revenue stream from the same resources. In his words, he was “putting more through the pipe”. He also learned how to increase his margin and lower the cost. While other yards at the time sold many parts together and had to guarantee buy-backs because the value of the purchase was higher, Willis sold the parts individually and didn’t have to guarantee buy-backs so that his margin was higher than his competitors. Additionally, the founder of Copart bought yards in strategic places. That way, he could cover more areas without incurring more tolling expenses and hurting his margin. A bit later, he managed to buy parts in bulk from Asia to take advantage of cheap labor and wholesale pricing, and sold them at retail prices.

Many books were written on Blue Ocean Strategy, which basically means that companies can gain advantage by finding under-served customer segments and focusing on that particular segment instead of launching lookalike products or services and having to compete with many rivals. You can learn the same lesson from Willis in his book. He wisely specialized on Chrysler parts which weren’t popular at the time. The specialization gave him two advantages. First, he didn’t have to compete with others on Chrysler parts. In fact, Chrysler was happy to partner with him to some extent. He could secure the parts more economically. Second, Chrysler customers were even referred to his yards because others didn’t have the parts.

There are other plenty of good anecdotes and lessons from this book. If you want to learn great business lessons or just want to get to know Copart, I highly recommend this book. Below are some excerpts that I like

Everyone Is Created Equal, but They Aren’t Always Treated Equally While hard work became second nature, I learned it wasn’t always a guarantee of success, and people aren’t always treated equally for equal work. The world was unfair, and this bothered me.

Johnson, Willis. Junk to Gold: From Salvage to the World’S Largest Online Auto Auction

To us, the business world was black and white, and a deal you aren’t sure about isn’t really a deal at all. It never ceases to surprise me, though, when others cross that line without even a blink of an eye. I was raised to believe that cheating is the same whether you are taking ten cents or $10,000. And if you could do it once, there was a good chance you would do it again.

Johnson, Willis. Junk to Gold: From Salvage to the World’S Largest Online Auto Auction

Dad also had an expression: “Take care of your pennies and the dollars will take care of themselves.” It’s a phrase I have also passed on to others so they would learn the same lesson I learned from him—that small amounts of money can add up to either big profits or big losses. You can’t ignore the small expenses or the small amounts of money unaccounted for if you hope to succeed at the end of the day.

Johnson, Willis. Junk to Gold: From Salvage to the World’S Largest Online Auto Auction

There were pockets of General Motors and Ford specialty yards but not Chrysler, so we were filling a need for a big area. It was also cheaper to stock Chrysler parts. At the time we were still partly in the scrap business, so we could buy all the junk Chrysler cars for thirty-five to forty dollars whereas we were paying seventy-five to one hundred dollars for General Motors junk cars. I could go to an auction and buy a wrecked Dodge Polara for twenty-five cents on a dollar compared to a Chevrolet. So I could buy parts cheaper, but the parts were just as valuable, especially since no one else carried them. Before we specialized, Curtis and I were running between $3,500 and $5,000 worth of parts a month at Mather. After specializing, we were running around $3,500 worth of parts a day.

Johnson, Willis. Junk to Gold: From Salvage to the World’S Largest Online Auto Auction

I spent $110,000 on a large reel-to-reel computer—about double the amount most people spent on a house at the time. The reels themselves were fourteen inches in diameter and stored all the information about the business and its inventory. Every night, new reels were put on the computer to back up the information. This resulted in boxes and boxes of reels. Today, an iPhone could probably hold the same amount of data. Curtis remembers that other people thought I was crazy (or stupid—or maybe both) to spend so much money on a computer for a wrecking yard. But I was never afraid to spend money on technology if it could help us be more efficient. And it turned out that the whole industry would end up computerizing once they saw the benefits it gave people like me and Marv.

Johnson, Willis. Junk to Gold: From Salvage to the World’S Largest Online Auto Auction

Instead of waiting for the DMV to find a better way, I went to them and proposed a solution. I would develop a way to create electronic forms and print them from a computer, thereby eliminating the need for the DMV to send out the books at all, saving them money and my business valuable time. I spent about $40,000 building the computerized system for the state of California. Now we could go to the computer and fill out all the paperwork needed and didn’t have to wait for books. It sped up the whole process and was an example of how it pays to fix something yourself instead of waiting for someone else to solve the problem for you.

Johnson, Willis. Junk to Gold: From Salvage to the World’S Largest Online Auto Auction

Every time you can add a revenue stream to the same pipeline, the profit margins change drastically. You are putting more through that pipe. That’s what I always tried to do in my businesses, and it is how we were successful.

Johnson, Willis. Junk to Gold: From Salvage to the World’S Largest Online Auto Auction

“Barry, here’s the thing. I’m not just buying a can of soup for twenty-nine cents and selling it for forty-nine cents,” I explained. “I have ten different services that are growing all the time. Think of us like the local sewer system.”

Well, that got his attention.

“We’re a utility. Nothing can get rid of us—nothing. Two of the biggest businesses in the world are car manufacturers and insurance companies,” I went on. “If insurance companies don’t write insurance policies on cars, then they’re out of business. If manufacturers don’t make cars, then they’re out of business. They’re always gonna make cars, and they’re always gonna insure them. We’re the guy in between.”

I looked him right in the eye and said, “As long as we’ve got the land in the right place to put the cars on, we can’t fail. We are like the septic tanks of the sewer system. You can’t have the system without us.”

Johnson, Willis. Junk to Gold: From Salvage to the World’S Largest Online Auto Auction

In the meantime, IAA was gobbling up facilities across the country as fast as they could. I knew from my dealings with Bob Spence that their plan was to acquire as many locations as they could and let the yards still run like they had been before they purchased them, even if that meant they ran on separate computer systems and used different business models. IAA figured they’d worry about converting them into one system later, when they had finished growing.

My philosophy was much different. I felt Copart should grow slowly, acquiring strategic locations and then converting each one over to the Copart system and business model immediately. Jay had already become an expert at converting yards—taking the lead in changing things over in all the facilities I had acquired while getting ready to go public.

I just didn’t want to grow to grow. I wanted to build a brand. I wanted anything with a Copart logo on it to run the same way—same computer system, same pricing, same way of treating our employees—so people started relating our name to a certain way of doing business. We spent time converting things over and converting employees over and teaching them our way of doing things because in many cases, the old way they were doing things hadn’t been working. That’s why they had to sell.

That’s also why I think IAA’s approach to keeping newly acquired yards running the same way was wrong. They weren’t fixing what was broken in the first place.

Johnson, Willis. Junk to Gold: From Salvage to the World’S Largest Online Auto Auction

Weekly reading – 7/17/2021

What I wrote last week

A strong debut weekend of Black Widow highlights Disney’s competitiveness

Business

The Verge did a great comparison of smart trackers from Apple, Samsung and Tile. Tile is really in a bind here. Its products are not substantially better than the others, to the extent that can justify the inferior network of trackers that Apple and Samsung can boast. Unfortunately, that’s the one thing that makes these trackers valuable in the first place

Facebook Users Said No to Tracking. Now Advertisers are Panicking. There seems to be a genuine angst from developers and advertisers over Apps Transparency Tracking (ATT). The thing is that when it comes to tracking, the interests of developers and consumers aren’t necessarily aligned. In that case, Apple has to pick a side and it decided to side with consumers; which is an understandable decision for two reasons: 1/ it’s what Apple has always been about and 2/ Consumers are ultimately their source of income and profit. Sure enough, it’s in Apple’s interest to have a great relationship with developers. But when it comes to the list of top reasons why Apple exists, I don’t think assisting all developers for free is anywhere near the top. The whole situation seems like when oil companies complain about governments’ policies that curb oil extraction in order to protect everyone else.

Inside Facebook’s Data Wars. When you allow misinformation to spread frictionlessly, it’s kinda hard to convince others that you are not an echo chamber of misinformation

Dara Khosrowshahi, Dad of Silicon Valley

Profile of Melanie Perkins, Co-founder and CEO of Canva

What I found interesting

Lewis Hamilton: ‘Everything I’d suppressed came up – I had to speak out’

Is a Graduate Degree Worth the Debt? Check It Here. The debate over whether a university degree is worth the financial investment is very nuanced and it’s not just about the money. However, it’s undeniable that what one can learn from the Internet for much less money increasingly puts in the spotlight the high tuition fees and all the nonsensical charges that schools levy on students

Alcohol Use Linked To Over 740,000 Cancer Cases Last Year, New Study Says

Stats that may interest you

Since 1928, every S&P500’s bull market cycle lasted more than 1,100 days on average while that of a bear market cycle averaged 207 days

Engineers in Japan reached the new record for Internet speed at 319 Terabits per second, two times faster than the previous record

Edge_Retail_Insight-top_global_food_retailers-channels.png
Source: Supermarketnews

A strong opening weekend for Black Widow highlighted Disney’s competitiveness

In a rare move, The Walt Disney Company disclosed some details around revenue and profit made from streaming. Per Variety:

Disney and Marvel’s superhero adventure “Black Widow” captured a massive $80 million in its first weekend, crushing the benchmark for the biggest box office debut since the pandemic. The film, starring Scarlett Johansson, is the first from the Marvel Cinematic Universe to open simultaneously in movie theaters and on Disney Plus, where subscribers can rent “Black Widow” for an extra $30. Disney reported that “Black Widow” generated more than $60 million “in Disney Plus Premier Access consumer spend globally,” marking the rare occasion in which a studio disclosed the profits made from streaming.

Directed by Cate Shortland, “Black Widow” collected an additional $78 million from 46 international territories, boosting its global box office haul to an impressive $158 million. Combined with Disney Plus numbers, the final weekend figure sits at $215 million. Curbing overall ticket sales, however, is the fact that “Black Widow” still doesn’t have a release date in China, which is an all-important moviegoing market for the Marvel franchise.

A few things that jumped out to me with this report. First, Disney continues to show the ability to tell appealing stories to a wide audience. Granted, not everybody will enjoy their stories, but the revenue numbers don’t like. They have crushed revenue expectations in the past when the majority of movies that crossed $1 billion in revenue came from the studio and Endgame is still the top two successful movie of all time. Netting $215 million in the first weekend without China when many markets are still dealing with Covid-19, especially the Delta variant, is a great sign in my book.

Second, Disney has a unique ability to be flexible with how they introduce their movies. All the series such as Loki, Wanda Vision or The Falcon & Winter Soldier are exclusive on Disney+ and that makes sense. For the movies, they can reach the audience in different ways. Movies can be exclusive on Disney+ for free to all subscribers or to Premier Access buyers first and to all subscribers after a few weeks. Disney can choose to release movies in theaters first and then on Disney+. Or they can release it in theaters and on Disney+ with Premier Access; which is exactly what they did with Black Widow. The flexibility allows the company to react to the changing environment caused by Covid. Plus, it’s a great tool to maximize revenue and profit. Movie theaters will bring in nice revenue, but whatever money Disney generates from Premier Access is pure profit.

This unique flexibility is a competitive advantage that none of Disney’s competitors can copy. To convince people to shell out another $30 after already paying a membership, a streamer needs a strong brand and IP. Disney has that. Does Netflix have any movie that could do the same? I don’t think so. Even if a streamer has the necessary IP, does it have all the other ingredients needed t o pull the feat off? Like, if the streamer has a big enough subscriber base to even move the needle? Or does it have the relationship with theaters to negotiate a deal like Disney did? I think other streamers will look at today’s announcement from Disney with interest and try to explore the possibility of copying the model. So I will look forward to see how they can pull it off.

In the last earnings call, Disney reported that they had about 104 million Disney+ subscribers with a third coming from Hotstar in India. Hotstar subscribers pay much less for a Disney+ plan, hence it drags the whole streamer ARPU down. What’s interesting in this case is that Disney+ Premier Access is not available in India. News outlets such as Yahoo reported that the feature was not available in India. My friend from India confirmed it too. Given that Premier Access costs more or less $30 in every available market, $60 million in revenue from the feature means that around 2 million subscribers or around 1-2% of Disney+ subscriber base paid for early access to Black Widow.

Netflix bulls will keep pounding on the big lead that Netflix has over other streamers and, as a result, the cost advantage. That’s true. But what Disney shows is that there is an alternative way to succeed. Disney doesn’t have yet the subscriber base like Netflix has. But it has other unique assets: 1/ A dedicated fanbase to its IPs; 2/ The flexibility to make money from other channels, not just its streaming service; 3/ Its theme park complements nicely its Direct-To-Consumer segment. When you generate more money per movie than your competitors, does it matter whether it comes from your subscribers? That’s not to say Disney can neglect the task of increasing its customer base. It’s important that Disney can catch up to Netflix on this front and please investors in the short term. But it’s even better to introduce Disney+ at a low price in many markets to attract audience while making money from theaters and Premier Access. So far, I haven’t seen another company with this model.

Disclosure: I have a position on Disney and Netflix.

Weekly reading – 7/10/2021

What I wrote last week

I wrote about Clear Secure, which just recently went public

Business

Japan launches bid to regain its semiconductor crown. “Japan’s plans are less about boosting output than about avoiding being caught in the crosshairs of global tensions, notably the fierce competition between the US and China for dominance of future technologies.” It will be hard to play catch-up in the semiconductor industry, but I wouldn’t rule out Japan.

Starting April 22, 2022, Visa will lower interchange rates for Card-Not-Present tokenized transactions and increase rates for some Card-Not-Present untokenized ones. In layman’s terms, it means that merchants will get to keep more money (maximum 10 basis points) if they encourage customers to pay online with mobile wallets such as Apple Pay or PayPal. Nothing spurs actions like incentives.

Universal films will head exclusively to Amazon Prime Video after their run on Peacock. Amazon has been aggressively investing in content on Prime Video. First it secured rights to stream NFL Thursday games starting next year. Then, it bought MGM Studios. Now, it will bring over Universal films after the initial premiere on Peacock. Amazon has been on the record pleased with Prime Video as an acquisition and retention tool for their lucrative Prime customer base. The Prime customer base in the US, since streaming rights are geographically dependent anyway, should be big enough to justify Amazon’s outlay.

FACT SHEET: Executive Order on Promoting Competition in the American Economy. I like what I saw from this Executive Order. I hope that the responsible Departments will soon introduce and implement policies. I, for one, would love to have another Internet provider in my building, in addition to Cox

Didi Tried Balancing Pressure From China and Investors. It Satisfied Neither. “The regulators in Beijing were under the impression Didi would pause its initial public offering while it addressed data-security concerns, according to people familiar with the company’s conversations with regulators. In New York, Didi offered assurances that Beijing had given it the green light, said people close to the listing process.”. It sounds like Didi wasn’t honest and straightforward with investors; which you know is a crime. On a side note, unless somebody lives in China or really understand what goes on in the country, for the life of me, I don’t understand why they will invest in Chinese companies. Just look at Didi and Alibaba as examples.

What I found interesting

The Senator Who Decided to Tell the Truth. I’d have a beer with this Senator. As a GOP politician, he was brave to tell the uncomfortable truth when his constituents didn’t want that truth. Whether you agree with his report, we definitely need more truth-telling and honest people like McBroom

A new road to an inaccessible land. An awesome write-up on the highly remote Wakhan Corridor in Afghanistan. The area looks pristine and beautiful. I love this kind of exploratory pieces that can educate people on places that they would not hear about

Steve Jobs in Kyoto. Just a beautiful story on Steve Jobs. He made the world a better place and was gone too soon. But he is still an inspiration to many now and in the future.

Casualties of Perfection. “If your job is to be creative and think through a tough problem, then time spent wandering around a park or aimlessly lounging on a couch might be your most valuable hours. A little inefficiency is wonderful.”

Hands-on: How to edit PDFs with iPhone and iPad in the iOS 15 Files app

It’s Official. We Can Now Harvest Usable Lithium From Seawater. The science is there. The experiments were tried. I now look forward to the implementation in the real world. If we can get lithium from seawater and inexpensively, that’ll be a major plus for the world

A short movie on Japan

Stats that may interest you

Cleaner air has contributed one-fifth of U.S. maize and soybean yield gains since 1999

Apple stores 8 million TBs on Google Cloud

The number of mobile wallets in use worldwide is expected to reach 4.8 billion in 2025, up from 2.8 billion in 2020

Fincog Overview of BNPL Providers, Ranked by Size
Source: Fintechnews

Clear Secure – Plenty of growth opportunities and a couple of red flags

Clear Secure made its debut on the stock market this week at around $4.5 billion in valuation. I read its S-1 and wanted to talk about some of my notes.

What is Clear Secure about? In essence, the company is all about using biometrics for security. Think about how, in movies, people use retinas or fingerprints to unlock valuable assets in a vault or a safe. CLEAR gives customers access to services that they already paid for. With CLEAR, partners can be assured that customers are who they say they are and elevate the customer experience due to expedited verification process. On the other hand, instead of waiting for a long time in lines, customers can have a more pleasant experience with dedicated CLEAR kiosks, applications and lanes. Below is an example of how it works at airports.

CLEAR makes money from two sources: partners and end users. Partners that use CLEAR technology compensate the company based on the number of users or transactions. Even though there is no mention of a standardized contract structure in the prospectus, usage-based pricing means that once CLEAR is established, the more popular and used it is by end users, the more revenue the firm generates. In addition, CLEAR also makes money from CLEAR PLUS, its flagship subscription. With CLEAR PLUS, users can save time at airports by using dedicated CLEAR lanes to quickly verify their identity and travel credentials before entering the physical security check. CLEAR PLUS is priced at around $175/year and if you enroll at airports, you can get one month free trial. In January 2020, CLEAR announced that it was selected by TSA to handle both renewals and new subscriptions for TSA Check. As part of the agreement, CLEAR will be allowed to sell a bundled subscription for both TSA Check and CLEAR PLUS. While both services are essentially the same, TSA Check has a much wider coverage in the U.S. The program is expected to go live in the back half of 2021 and will be a new revenue source for CLEAR. Apart from the aforementioned services, CLEAR also offers end users free access to other services such as Home To Gate, Health Pass or CLEAR Pass for CBP Mobile Passport Control. These freebies serve as an acquisition channel for CLEAR, but the company reported that in-airports are still the most popular one.

CLEAR has plenty of room for growth. Its kiosks are available in major airports nationwide, but there are still a lot more to cover. The company said in the prospectus that its footprint as of the end of May 2021 only covers 57% of the TSA departure volume in 2019 while the total signups to CLEAR PLUS reached only 4% of the potential market. If you think about it, what CLEAR offers can be useful to companies in many verticals. Hospitals or healthcare firms can access confidential information quickly without a slew of forms. Hospitality players can check in and out guests more quickly with CLEAR. Sports events can handle the inflow and outflow of spectators more efficiently. Plus, CLEAR is available only in the U.S now. Right now, CLEAR already has a commercial agreement with Wal-mart, MLB, NBA, Delta Airlines, United Airlines, 67 Health Pass-enabled partners and 38 airports. International expansion is a tricky yet lucrative opportunity. Given the increased publicity from its IPO, I suspect that CLEAR will have an easier time than before talking to new partners.

According to the S-1, CLEAR information security program received the highest designation according to the Federal Information Security Modernization Act from DHS. It is also certified as Qualified Anti-Terrorism Technology under the Support Anti-Terrorism by Fostering Effective Technologies Act of 2002 (“SAFETY Act”). U.S Customs and Border Protection also uses CLEAR to let U.S citizens and permanent residents enter the country more expeditiously. Additionally, it will help TSA handle new subscriptions and renewals for TSA Pre Check. The acceptance and certifications that come from the federal government are a robust competitive advantage for CLEAR. It’s not easy at all to win these designations and work with the government, especially when it comes to security. The longer CLEAR is in the market, the more weight and trust the CLEAR brand will carry, making it exceedingly difficult for any challenger to compete. In the world of security, trust and brand names are of utmost importance. Those can take a long time to gain yet seconds to lose. So far, CLEAR has done a very good job of building its credentials. Any challenger will have to take time to go through the same process and no money in the world can speed up the process. Meanwhile, CLEAR can continue to expand its footprint & verticals and use more usage data to improve its technology platform and strengthen its lead further.

Let’s dig into the numbers. Compared to March 2019, enrollments, uses and total bookings in the quarter ending March 31, 2021 were up meaningfully. If you question why retention rate has been trending down and why the explosive growth often seen in IPOs is absent here, it’s worth noting that Covid-19 severely limited in-person events as well the travel industry; therefore, it is not surprising to see such a great adverse impact on CLEAR’s business. With that being said, as the country is opening up, travel is getting back to 2019 level and in-person events are relatively safe again, do expect to see these numbers go up in the next few quarters.

In the last two years, CLEAR had positive operating income only in two quarters, at the height of Covid. What concerns me isn’t the lack of explosive growth many may expect. It is the lack of economies of scale. Compared to 2019 quarters, the quarter ending March 31, 2021 didn’t seem to show that CLEAR gained much more efficiency. Granted, the impact of Covid-19 is undisputed and the company did seem to transfer some marketing expenses to R&D; which is a positive sign for a technology platform. Yet, the two biggest expense line items in Direct Salaries and G&A, mainly stock-based compensation, still dominate their cost structure. That makes me wonder when this trend will end, given that historical data in the last two years indicate otherwise.

Another red flag is that the company has a shareholder deficit. Total shareholder equity is the difference between total assets and total liabilities. A deficit means that CLEAR’s liabilities are larger than its assets and that it has been losing more money than what investors put in so far. While a deficit may be the short term pain in exchange for the groundwork for future success and the IPO should give CLEAR a big windfall, investors shouldn’t gloss over this fact.

I like the potential growth and the competitive advantages that CLEAR has while being a bit concerned about how the company is currently managed. I put the company on my watchlist and will monitor it in the near future to see if it makes sense for me to take a position.

Weekly reading – 3rd July 2021

What I wrote last week

My thoughts on why investing is hard

Business

Credit Suisse 2021 Report on Payments, Processors & Fintech. This deck is long and has tons of information. You can get a lot of pointers out of it, but be aware that many slides have quite old data.

The economics of dollar stores. An excellent post by The Hustle on how dollar stores work. The most interesting things to me are 1/ unit prices on some items at these stores can be higher than those at bigger chains such as Target or Walmart. The absolute prices are lower, but they are also on a much smaller volume. 2/ These stores seem to be more concentrated in poorer neighborhoods. I read somewhere that richer customers don’t mind the stigma of buying stuff at dollar stores. I wonder if that’s still true and how much the trend is a boost to these stores’ business.

How a Beer Giant Manages Through Waves of Covid Around the World. A great story of how a global business uses data analytics to make decisions in the tumultuous pandemic. Even when the AB Inbev’s data team accurately predicted the second surge in India, it did get the previous predictions wrong. Nobody has a crystal ball to see the future. All we can do is to increase the odds with a wealth of data and machine computing.

Mac sales in India tripled after online Apple Store opened. One aspect of Apple’s business that I think should be discussed more is its retail stores and website. The report here credited the presence of Apple’s website for the significant increase in sales. I also learned from the article that to launch own-brand eCommerce sites in India, companies need to source locally 30% of their production. I guess there is a side benefit of expanding supply chain in India, apart from lowering the risk of over-reliance on China.

What does MongoDB do?

An interesting article on the next CEO of Amazon, Andy Sassy. The level of detail orientation described in the article is admirable. I love the concept of the Wheel of Death. People naturally tend to get complacent. Having them on their toes and preserving the unpredictability is a great way to ensure that they perform to the level required.

What I found interesting

Inside Wikipedia’s endless war over the coronavirus lab leak theory. Content moderation is super difficult at scale. Especially when you are widely considered to be neutral and often accurate. And during a global pandemic.

Equipping cargo ships with puffy sails could help Michelin improve a vessel’s fuel efficiency by 20%

The 5 coolest trends in urbanism … in Europe

Stats that may interest you

U.S online grocery sales hit $7 billion in May 2021, just a bit higher than the figure in March 2020, right before Covid

1/3 of U.S grocery sales comes from independent supermarkets

1 out of 3 men in the U.S reported to have fewer than 2 close friends, excluding relatives, according to a survey in May 2021

According to Bain, Covid increased the forecast online sales as % of all grocery sales in the US in 2025 from 8% to 13%

Average Prime Day order in 2021 was $47.14, down from $54.64 and $58.91 in 2020 and 2019 respectively

Amazon Pay Later hit 2 million sign-ups in India

97% of customer auto purchases in the U.S involves online research, but auto eCommerce only makes up 1%

Investing is hard

I have thought a lot about this scenario: If somebody who essentially relied on a coin toss before every trade makes a great return and told me to follow his method, would I take the advice and implement it? Using a coin toss as an investing strategy doesn’t sound very logical or robust, does it? But does how a strategy sounds really matter when there is a return to back it up? If somebody else had a lower return using a more sophisticated method, would you still opt for the higher level of sophistication or for a coin toss?

I have never been a great believer in cryptocurrency or Bitcoin in particular. But in 2020, I had an inkling that as Bitcoin was trading around $4,000 per coin, it was a great entry price and I would make a significant profit. Yet, I didn’t act on it because trading without knowing the fundamentals of the asset isn’t my thing. Needless to say, that mistake cost me a lot. If investing in cryptocurrency yields a great returns, does it really matter whether you understand Bitcoin and why its price goes up or down? If somebody in November 2020 bought, say, 5 Bitcoins at $4,000 by simply tossing a coin, how could I criticize that method when my return is so much lower?

I have seen a lot of people try to be clever, diligent and sophisticated in picking stocks with multiples, DCF and all the fancy ratios. However, if a higher level of sophistication is required for a successful portfolio, why do we keep hearing experts say that it’s better to invest in indexes? In an experiment cited by this episode of Last Week Tonight With John Oliver, some professional stock pickers were pitted against a cat. The result? The pros had a 3.5% return, dwarfed by 11% return of the cat! I have my own personal example on this too. I usually invest time in understanding a company before purchasing the stock. However, one of my most profitable trades is MongoDB, which came from a friend’s tip and for which I didn’t do much due diligence before taking a position. I was thinking: well, I trust my developer friend and let’s use this as an opportunity to see what return I’d have with virtually little study into the company. Over the same period of time, my position on PayPal, which I spent a lot of time studying and even wrote about, hasn’t delivered as high a return as my random bet on MongoDB. But then you may ask: well, in the long term, PayPal is a better bet than MongoDB. And that’s what makes investing so challenging.

To me, investing is a combination of art and science, and it’s more of the former than of the latter. There are a lot of questions that aren’t easy to answer. How could you tell if your investing method works? What is the comparison yardstick? If you take inspiration from somebody else, how can you know that the borrowed method would work? If your investing horizon is long-term, how far in the future is that long term? Do you have the temperamental and psychological make-up to resist your temptation and urges? If a position is ruined by a force majeure, will you still have confidence in your ability and strategy? Will you give yourself a pass because the failure is caused by an unexpected event? Or should you get some blame for failing to apply some risk margin to your decision-making?

I think about those questions quite often and while I don’t have concrete answers, it doesn’t bother me. It’s part of the game and the difficulty as well as the uncertainty are what make it so exciting. I am sure there are thousands, if not millions, of investors out there that have a better return than I do. That’s fine. As long as I learn more about myself, improve during this investing journey and receive a sense of fulfillment, even though I can’t put a number on it, that is enough.

Weekly reading – 26th June 2021

What I wrote last week

A great podcast episode on Formula One as a business

Business

The World Relies on One Chip Maker in Taiwan, Leaving Everyone Vulnerable. The whole tech industry relies so much on TSMC and the story is likely to continue in the near future. It’s expensive and time-consuming for other countries to build anything that can compete with TSMC. On the other hand, this puts TSMC in an awkward position where it has to deftly navigate the complex political conflicts between superpowers.

Shop Pay available to all businesses on Facebook and Google. I think Shopify is trying to do two things here with this move: 1/ it’s trying to use Shop Pay as an acquisition tool. By making the checkout option available to even non-Shopify merchants on Facebook and Google, it is hoping that the tool can lure these merchants into selling on their platform. 2/ Obviously, this is going to also help Shopify increase revenue. Even though Shopify’s GMV has grown seriously in the last few years, GMV of non-Shopify merchants should be a lot bigger. Taking a slice of every non-Shopify transaction can be a lucrative business

Amazon labels millions of unsold products for destruction, new investigation finds. Lately there have been way too many articles that shed light on distasteful aspects of Amazon, from unbearable waste to unacceptable treatment of its worker. I have to admit that even though I am a fan of the business as I learned a lot from its story and I am a shareholder, I am strongly considering selling it as it’s just not comfortable any more.

A timeline of Google’s attempts at building a messaging app. The fact that you may be more familiar with Zoom, Teams or Slack should tell you a lot about how successful these attempts have been. Nonetheless, it doesn’t mean that they won’t succeed, ever.

Facebook officially launched audio rooms and podcasts in the U.S. Facebook is an extremely fast follower that is quite often deadly and effective at scaling what others made known. How they are going to make these new features will be interesting. I mean I am not an active Facebook user and neither are most of the people in my circle. Who will use these features to create content? Will celebrities and people that have a following choose to host their content on Facebook? Especially given that they should already have a home on either Twitter or Clubhouse? One big advantage that Facebook has over Twitter and especially Clubhouse is that it is much more famous and the network effect is easier to scale.

This one email explains Apple. The article does a good job of fleshing out a very interesting email exchange that could well be the foundation of the App Store

What I found interesting

Incredible 15th-Century Japanese Technique for Growing Ultra-Straight Cedar Trees. I love Japan and its culture. This is just one of the many many reasons.

Adobe launched tools to create 3D

Marc Andreessen just had a very interesting interview recently. In response to the question of what advice he would give to a 23-year-old, here is what he had to say

Don’t follow your passion. Seriously. Don’t follow your passion. Your passion is likely more dumb and useless than anything else. Your passion should be your hobby, not your work. Do it in your spare time.

Instead, at work, seek to contribute. Find the hottest, most vibrant part of the economy you can and figure out how you can contribute best and most. Make yourself of value to the people around you, to your customers and coworkers, and try to increase that value every day.

It can sometimes feel that all the exciting things have already happened, that the frontier is closed, that we’re at the end of technological history and there’s nothing left to do but maintain what already exists. This is just a failure of imagination. In fact, the opposite is true. We’re surrounding by rotting incumbents that will all need to be replaced by new technologies. Let’s get on it.

Source: Interview with Marc Andreessen by Noah Opinion

Stats that may interest you

The average age of vehicles in the U.S was 12.1 years in 2020

Shops, Facebook’s equivalent to Shopify, has 300 million monthly visitors and over 1.2 million monthly active Shops

DuckDuckGo has been downloaded 50 million times over the last 12 months and it has been profitable since 2014