Weekly reading – 26th November 2022

What I wrote last week

Attention to detail matters

Business

Welcome to the Ambaniverse. It’s scarcely believable to me how much Mukesh Ambani and his companies touch the life of Indians

($) What Do the Worst (and Best) Airports Look Like? Ask United Airlines. Ever flew with United Airlines to/from Newark and got delayed? This article will share some insights as to why.

The ‘Amazon of Africa’ is reducing staff and cutting premature products in its new era. Amazon relies on its grip over loyal shoppers who subscribe to Prime in order to woo advertisers and merchants. Jumia is doing the opposite. The company claimed that it was marching towards profitability and cutting initiatives that were not contributing to that goal. A Prime-like subscription is likely not profitable, but it remains to be seen if it is wise to go ahead without one. I really look forward to seeing how Jumia will be in two years and their reflection on the decision made today

Tax filing websites have been sending users’ financial information to Facebook. I haven’t used any website listed in the article, but I am pretty angry. The practice of sharing tax data with another party without consent is distasteful and fraudulent. Even if tax-filing websites shield themselves by using the “terms and conditions” page that nobody ever really reads, the government should just outright ban that deceitful practice and prosecute those that don’t safeguard consumer data properly.

($) Disney’s Robert Iger Loomed Over His Successor as CEO, Creating Tensions. I feel like FTX & SBF and Twitter & Musk became some sort of old news when the headlines were all taken over by Disney and Bob Iger. Bob Chapek’s tenure was littered with missteps and investor doubt. I had a serious concern when he decided to jack up prices at the parks. He increased the streaming target significantly, albeit with little experience to show for it. There were also problems with Scarlett Johansson and Florida’s Governor De Santis. The fact that he was let go is not without cause. What surprised everybody is Bob Iger’s return. He was Disney’s CEO for 15 years and repeatedly reneged on his promise to pick a successor multiple times before choosing Chapek. Bob Iger was a legendary CEO when he retired. The man built Disney’s massive IP library, took the company’s name & its properties to new height and delivered blockbuster after blockbuster. But the company he is taking over faces different challenges than when he left. There is no telling that he will succeed this time. Is he a better choice than Chapek? I think so. Does Iger’s return mean that the company is out of the woods? Not necessarily.

The Perks of a High-Documentation, Low-Meeting Work Culture.I am a fan of a culture that favors documentation and writing. First of all, writing fosters deep thinking and sharpens ideas. Second, it can level the playing field for people who that speak the language fluently. For those who don’t write well, I do think it’s an easier fix than to ask non-native speakers to articulate their points naturally. Third, great documentation transfers knowledge seamlessly. No matter who leave or stay, the domain knowledge stays with an organization and gets passed on to the next persons through write-ups, memos or reports. Last but not least, as the article mentioned, meetings have a way of disrupting and lessen the actual work

($) Was This $100 Billion Deal the Worst Merger Ever? A long great read on the AT&T – Time Warner merger that will go down in history as one of the worst mergers and value destructions ever. Several factors contributed to the mess: a legal debacle that took two valuable years, two cultures that never gelled, the cut-throat competition and executives who didn’t have a strategic plan nor execution to realize all the potential value, if there was any.

Other stuff I find interesting

($) North America’s EV Future Hinges on a North Carolina Turtle Pond. “In Kings Mountain, North Carolina, there’s a tree-filled park that provides urbanites from nearby Charlotte some respite in nature. At its center is a tranquil pond, featuring turtles, fish and other wildlife. The sparkling waters, which plunge some 150 feet deep, are the result of decades of accumulated rainfall in a defunct lithium mine. By contrast, China dominates the global supply chain for EV batteries, boasting 79% of the world’s lithium-ion battery manufacturing capacity, versus just 5.5% for the US.

Megalopolis: how coastal west Africa will shape the coming century. Visiting Africa and the stretch described here is a dream that I want to realize in the next 10-15 years. “By the end of the century, Africa will be home to 40% of the world’s population – and nowhere is this breakneck-pace development happening faster than this 600-mile stretch between Abidjan and Lagos. It is a stretch of coastal west Africa that begins in the west with Abidjan, the economic capital of Ivory Coast, and extends 600 miles east – passing through the countries of Ghana, Togo and Benin – before finally arriving at Lagos. Recently, this has come to be seen by many experts as the world’s most rapidly urbanising region, a “megalopolis” in the making – that is, a large and densely clustered group of metropolitan centres. When its population surpassed 10 million people in the 1950s, the New York metropolitan area became the anchor of one of the first urban zones to be described this way – a region of almost continuous dense habitation that stretches 400 miles from Washington DC to Boston

A very handy website on industrial tourism in Japan

The truffle industry is a big scam. Not just truffle oil, everything. There are three biggest takeaways for me: 1/ the truffle oil is a fraud; 2/ depending on the type of truffle and when it can be harvested, out-of-season truffle is also a fraud because it cannot be preserved for long; 3/ there are many types of truffles and some can be much more expensive than others

Stats

e-bike sales in Finland (by units) in 2022 increased 53% year over year

Alexa is reportedly on track to lose $10 billion this year

Brands pay young YouTubers a lot of money for product placements, from $75,000 to $300,000

Attention to detail matters

Great executives pay attention to detail. Here are a few examples:

Vic Gundotra, who managed Google+, had a legendary interaction with the late Steve Jobs. In 2008, Steve called Vic on a Sunday while he was in a religious service. Vic didn’t pick up so Steve left a message saying that he had something urgent to discuss. Vic called back and it turned out that Steve was unhappy the second O in the Google logo on the iPhone at the time didn’t have the right yellow gradient. A CEO like Jobs paid attention to the gradient of the second O in the Google logo on a Sunday!

Tim Cook is another example of leaders who pay attention to even small details. When Tim first joined Apple, he held an operations meeting to learn everything he could about the company’s supply chain. Tim probed about the percentage of produced units that passed quality assurance before shipment. When told that the yield was 98%, Tim would ask: how did the other two percent fail? Tim also has a habit of waking up early to review sales data. He once discovered that one model of iPhone was more popular than another model in a small city in Georgia. The difference was due to different promotions run across the state.

Jony Ive was instrumental to the success that Apple had had for the past 20+ years prior to leaving the company in 2019. A great product designer, he was known for perfectionism and a maniacal focus on details. To demonstrate, here is an excerpt from Tripp Mickle book “After Steve” on Jony

IVE’S PERFECTIONISM intensified under Jobs. In 2002, Apple’s leadership agreed to change its laptop cases from titanium to aluminum, a more versatile metal. It tapped a Japanese manufacturer to produce the computer casing, and Ive traveled to Tokyo to evaluate their work with Bart Andre, the product’s design lead, and Nick Forlenza, an engineer who brought designs to life on the factory floor. Ive arranged to meet at the Hotel Okura Tokyo, one of the city’s oldest luxury hotels.

On the day of the meeting, the delegation from Apple and the manufacturer breezed through the hotel’s gold-hued lobby past shin-high tables to a private room. A Japanese executive pulled several aluminum laptop casings out of a manila envelope for Ive to review. The supplier had polished the parts to a shimmering satin silver that reflected the artificial light from the ceiling. Ive hovered over a casing and lifted it toward the light. His hands trembled with panic as his eyes glimpsed small deviations from his design specifications. He abruptly rose and left the group, upset.

Ive held an aluminum sheet above his head and rolled it beneath the overhead lights, showing Forlenza how the reflection revealed almost imperceptible blemishes. He wanted them eliminated. Forlenza explained the problem to the supplier, and when the group returned two weeks later to review the part again, the blemishes were gone.

Ive ratcheted up scrutiny of the supply chain as Apple’s product line expanded. When SARS broke out in 2003, the company was preparing to produce its first desktop made of aluminum, the Power Mac G5. The tower computer was the width and height of a paper grocery bag with smooth aluminum sides framed by front and rear panels that featured tiny holes like those in a citrus zester. Ive wanted to be there as it rolled off the assembly line, so he and members of the operations team flew to Hong Kong on some of the first post-SARS flights. They then headed to Shenzhen, where Ive spent the next forty days sleeping in the factory dormitory and walking the manufacturing floor. He could be intense as he surveyed an assembly line. During the assembly process, he would grab colleagues and point at a factory worker who was crudely handling parts.

“I don’t want him touching our products,” he would say. “Look at how’s he’s touching the side of it!”

Before being appointed to succeed Jeff Bezos and lead Amazon, Andy Jassy was the CEO of AWS, which he helped build from the ground up, and involved in every aspect of the division. He reviewed every press release and had input in branding decisions. He personally spent time picking artists for an AWS event in 2012 as well as took weeks to settle on the name Redshift for the new data analytics product. When there was a major outage at an AWS data center in Virginia, Andy personally got involved to figure out the problem. As it turned out, it was a fluke. While checking in a generator, a technician shut the door and accidentally turned off the generator. To keep employees to a standard that he subscribes to, Andy regularly holds meetings to pick teams, at random, to give a presentation on their business and fires pointed questions. Unprepared teams will be called out.

Toto Wolff is a team principal managing the Formula 1 Mercedes team. Under Toto’s leadership, Mercedes won 8 consecutive constructor titles and 7 driver championships between 2014 and 2021, establishing the dominance unrivaled in a sport as tough as Formula 1. In addition to many great leadership traits, Toto is also a stickler for the smallest of details. On his first trip to the Mercedes team’s headquarters in Brackley, England, Toto noticed a crumpled newspapers and two old paper coffee cups on a table in the lobby. After his meeting with the previous team principal, whom he replaced, Toto brought up his observation and said that it was below the standard of an F1 team to have a lobby like that. In another instance, Toto was upset about how dirty the bathroom in Mercedes’s hospitality area was the first team he visited. He hired a full-time hygiene manager, physically showed the manager how he wanted the bathroom cleaned and ordered the manager to keep the bathroom spotless after every guest on a race weekend.

F1 is a sport of details. Every race, drivers and their engineers analyze telemetry data like below to find out which MINI sectors and corners they lost lap time. Every thousandth of a second can determine a race’s pole and often a race win. Lewis Hamilton, the 7-time world champion, noticed others drivers were wearing fewer cables and as a result having an advantage of probably a few grams. He relayed that feedback to his team so that they could look into doing the same. Back when Lewis was still teammate with Nico Rosberg, Mercedes changed their drivers’ gloves and the way they were sewn so that they could get better race starts.

Source: Reddit

Weekly reading – 19th November 2022

What I wrote last week

PayPal has a monetization problem with Venmo

Harvard Business Publishing

Business

Why investors have jumped off the Carvana bandwagon. Carvana is another example that reminds me of that famous quote from Warren Buffett: “Only when the tide goes out do you discover who’s been swimming naked.”

Basically everything on Amazon has become an ad. “Successful Amazon sellers have to spend anywhere between 10 percent and 20 percent of their sales on Amazon ads, according to six high-volume sellers Recode interviewed. That’s on top of the other listing and warehousing fees they also give Amazon. Some said that the pay-to-play evolution of the site is one of the top two reasons they have had to substantially raise the prices of their merchandise on Amazon over the past year.” This is going to spell trouble for Amazon soon. A few of my purchases were off Amazon simply because the same items sold on the site were markedly more expensive. Keep this up and the company will soon have to re-acquire customers and rebuild its brand image. That’s too high a price to pay, just for advertising dollars.

Local ride-hailing startups thrive in the towns that Uber forgot. Giant ride-hailing companies compete fiercely with one another in big cities, leaving small and medium-sized towns ripe for the taking. And they are being taken over by local startups that saw unserved markets and decided to act. To grow, these startups should not venture into big cities. They should strive to continue to serve small and medium-sized towns across the continent. Regarding the likes of Uber, I don’t blame them for not attending to these small towns. Resources are limited and they can’t stretch themselves too thin.

Global Twitter employees describe chaos as layoffs gut their teams. The word chaos can’t even describe what is going on at Twitter, especially to the staff in India. Axing 50% of the policy team and 75% of the product team can’t benefit the company.

Sam Bankman-Fried vs. The Match King. The last few days have been littered with news and coverage of Sam Bankman-Fried (SBF) and FTX. The glamour and the superficial valuation masked the mess that went on behind the scenes. But this scandal is hardly the first. Not even close. This post compares what happened with SBF & FTX with the Match King, a businessman who had great success early on yet ruined everything when he was consumed by greed

The vomit-inducing piece on Sam Bankman-Fried by Sequoia. The venture capital firm is legendary for its longevity, success and role in helping entrepreneurs and startups thrive. However, this is a serious black eye. They penned this ridiculously flowery article on SBF, stuck it on its website under the tagline “We helped the daring build legendary companies”, yet removed it the moment news of trouble at FTX surfaced. Worse, the article recalled a meeting where the firm’s partners met Sam. No hard questions and little due diligence. They were wowed by SBF, who was literally playing games during the meeting. Mind-blowing stuff

Other stuff I find interesting

FTX turmoil destroys clout of crypto’s Washington spokesman. The fall of SBF and his companies apparently threatens to bring my regulatory heat onto crypto firms in the future. Well, I personally think that it’s a bit late. Regulators should have had more oversight and scrutiny over these crypto companies and celebrities.

TikTok’s Subcontractor in Colombia Under Investigation for Traumatic Work. On one hand, I understand that a job is a job, even one that requires people to watch horrifying content for hours. On the other hand, there should be safeguards built to ensure that these workers are treated properly and all measures are taken to limit the exposure to mentally harmful content.

People protested when this capital city went car-free. Now they love it. Ljubljana, the capital of Slovenia, sets an excellent example of how cities can transform themselves with micromobility and car-less space.

Stats

US consumers spent $72.2 billion online in OCtober 2022, according to Adobe

Americans have almost $5 trillion in cash as of Q2 2022

Honey bee life spans are 50% shorter today than they were 50 years ago

The world’s population hit the 8-billion mark on 11/15/2022

US online grocery sales totalled $7.8 billion in October 2022

Global lithium supply & demand forecast
Source: Global lithium supply & demand forecast by BloombergNEF

Breakdown of Harvard Business Publishing

If you have been to a business school or are just interested in business in general, it’ll be hard not to know about Harvard Business Publishing (HBP). Operating under Harvard Business School, the publishing arm is a well-known established name that offers great content, whether it’s case studies, articles or books on business lessons. Yet, very little has been talked about its unit economics and scale. In fact, nobody has spoken officially about HBP on record. Hence, I was really fascinated by Business Breakdowns’ episode on HBP.

HBP has a long history. Starting well over 100 years ago, the unit has evolved to being more than just a publisher of books. Today, it has four major business lines: case studies, advertising, print & digital subscriptions, and books. Together, these business lines generate $270 million in annual revenue with 40% from international markets, up from around $100 millions in the early 2000s. In terms of distribution, below is the estimated breakdown of HBP’s annual revenue

  • Subscription business: $35 million
  • Case studies: $80 – 100 million
  • Books: $27 – 54 million
  • Advertising: $90 – $130 million

HBP has great bargaining power as a seller and a buyer. From the supply standpoint, HBP has an unsurprising source of content. Harvard faculty members must contribute to the library of case studies to maintain tenure. Harvard is reportedly paying little for these case studies, yet making somewhere between $80 million to $100 million per year. These case studies from Harvard professors only make up 20% of what HBO has to offer. The other 80% are penned by professors from other places who are likely not better compensated than their Harvard counterparts. Even though we won’t find individual authors’ names on case studies, being able to show your work with a stamp of approval from Harvard means something.

On the other hand, HBP has no problems selling these case studies to business schools and companies. Universities love to add a flair of reality and pragmatism to theory by using real case studies. HBP carries a certain weight of authority and swagger in the academic world. Case studies are used semester after semester and they don’t need to be rewritten every year. In fact, my personal experience at a US university is that professors don’t like to change their curriculum every year either. As a result, HBP gets a sweet deal for them: pay little for a case study and milk revenue out of it every semester from every school that wishes to use it. The same goes for companies. If they want to train their managers and executives, what’s better than HBP case studies?

This goes to show what I think is the best asset of HBP: its brand. The brand draws readers to the materials that the publishing arm puts out and professors to create content for them. It makes everything tick.

While HBP’s achievements are admirable, there are two things that irk me. First, HBP can force professors, especially those employed at Harvard itself, to write case studies for them to avoid losing tenure and make a lot of money out of it while allegedly paying little for it. It would be a different matter if these professors weren’t under employment contract and voluntarily wrote for HBP knowing all the conditions. But since they already put in the work to keep the level of education worthy of the name Harvard, why can’t they be paid commensurately to what HBP earns on those case studies?

Second, a lot of HBP’s revenue is tax exempted. The speaker said that while HBP has to pay taxes on their advertising revenue, they don’t need to do so for the rest. I mean, Harvard charges arms and legs on tuition fees and has an enormous endowment fund of, wait for it, $53 billion as of June 2021. Do they really need tax breaks as much as small businesses that don’t even earn a fraction of what they do? I am not arguing that they can’t sell materials to other schools or whoever wants to read them. But there should not be any tax exemption on that revenue stream. That’s just absurd.

In short, I like this episode of Business Breakdowns as it sheds light on a business that few talk about. Have a listen if you are interested.

PayPal has a monetization problem with Venmo

The past three years has seen a breathtaking growth of Venmo. The number of active accounts grew from 40 million in Q1 2019 to 90 million in Q2 2022. Its Transaction Processing Volume (TPV) almost tripled in the same period of time, reaching $61 billion in Q2 2022. However, growth has been hard to come by in the last two quarters, especially in Q3 2022. TPV growth was only single digit in the last two earnings reports. The number of active accounts plateaued at 90 million. Available only in the US, where there are about 230 million consumers, one has to wonder how much room there is for Venmo to continue to expand domestically.

Venmo TPV and Active Accounts
Venmo TPV and Active Accounts

Going overseas sounds like a straightforward answer, but operationally, it is anything but. It would require a lot of investments in localizing the product, marketing to acquire customers, customer management to maintain engagement and compliance to stay on the good side of lawmakers. There must be a reason why PayPal hasn’t taken Venmo outside of the US. Given the missteps that the management has taken over the last few years, it’s not impossible that restricting Venmo to the US is a mistake. Personally; however, I can see why they haven’t.

If growth in TPV and user base slows down, what about monetization? PayPal reported that Venmo earned $250 million in revenue in Q4 FY2021 and $900 million in FY2021. Since Venmo processed almost $61 billion and $230 billion in TPV in the same periods respectively, Venmo’s take rate is about 0.4%. To put that take rate into context, let’s compare it to Cash App

VenmoCash AppNote
Monthly Active Accounts (in million)5749the Cash App number is the number of transacting accounts in September 2022
Transaction Volume (in $ billion) in the quarter ending Sep 30th, 2022644.3
Revenue (in $ million) in the quarter ending Sep 30th, 2022270118Venmo’s revenue is my estimate based on the $250-million figure reported for Q4 2021 while Cash App’s revenue only includes transaction-based revenue
Take-rate0.42%2.7%

The comparison shows that Venmo is seriously under-monetized compared to Cash App. PayPal has a valuable asset in Venmo that resonates with a lot of consumers in America, especially the younger crowd, but they don’t seem to be able to benefit from said asset. And don’t take my word on it as the CEO of PayPal is not entirely happy either

I am pleased with Venmo’s progress but I am not thrilled with all the progress that we’ve had. I just want to be up front with that. I feel like we can do a lot more with that asset than we have been able to do so far. There is a ton of potential there. The people who use Venmo, our customers love Venmo. It is a beloved brand. They use it all the time. You can tell from our monthly active users [of 57M]. The monthly active users are up by ~85% in the last 2 years or so. So, a lot of progress there. But I feel like there can be more progress.

These are some big merchants that are implementing Pay with Venmo and I think we will see more. We are going to revamp the card strategy, we started to begin to do that. We think that is one place that Cash App has done particularly well on, and there is no reason why we should not with our scale and size be able to really tap into a revamped card functionality. Over time, we will also begin to see more basic financial services there, savings and other things come into the Venmo wallet. There is focus on things that have to get done right now. Amazon and Apple are big opportunities, we want to make sure we take full advantage of those. We’ve got some basic hygiene work to do there. Good progress, but I wouldn’t call it great progress right now. In terms of revenue growth, we had anticipated that we would be about 50% revenue growth [for FY’22] and that is where we are year to date. Q4, like the rest of the business, is going to be weaker than we expected. That will probably take Venmo revenue growth into the 40%’s [year over year growth for FY’22]. That is probably a good place for you to assume it will end

Source: PayPal Third Quarter 2022 Buyside Call

Platforms like Venmo and Cash App monetize by charging sellers on every transaction and the majority of retail sales still takes place in stores. To facilitate in-store transactions, cards are the most successful medium. PayPal put a lot of efforts into QR Code during the pandemic, but they abandoned that push and have since switched focus to cards. Venmo credit card doesn’t require a Venmo balance, but it’s not available to every consumer, especially Gen Z users whose lack of credit history prevents them from qualifying for a credit card. I wouldn’t be surprised if Venmo credit card users constituted only a small percentage of Venmo active base.

While accessible to many more people, Venmo debit card requires a Venmo balance. The question then becomes: how can Venmo get users to park money on a Venmo account? Users only maintain a balance when there is enough utility, whether it’s rewards or accessibility at a variety of merchants. Cash App has been successful so far in this regard. Cash App reported that it had $2 billion of direct deposits in September 2022. Paper direct deposits into Cash App which was launched nearly a year ago cumulatively crossed $3.5 billion. These figures indicate how much Cash App users value the platform and how much they want to use it. This is something that Venmo has to, at least, replicate and there certainly is work to be done.

Cash App users can paper-deposit funds into their accounts at some retail stores, but Venmo doesn’t have this feature. Checks deposited electronically into Cash App will be available on the platform the next business day at no additional cost. With Venmo, users may have to wait up to 10 days to receive funds from an electronic check unless users pay a small fee to expedite the process. Any additional friction to the deposit process will deter users from bringing cash to the platform, so obviously I’d love to see Venmo at least get feature parity with Cash App.

Moreover, Venmo also needs to be available at more checkout pages. The partnership with Amazon which enables customers to add their Venmo account as a payment method will likely boost the perceived utility of Venmo. But there should be more partnerships like that. PayPal powers payments for some of the largest merchants in the US, whether it’s the branded PayPal or the unbranded platform Braintree. They should look into leveraging such an advantage to make Venmo more prominent. If a user could pay for Uber, Amazon or Instacart with their Venmo balance, that would obviously make Venmo more useful and appealing.

There is also a side benefit from having more customer funds. The more funds the likes of Venmo or Block have, the more interest income they can earn. In Q3 2022, PayPal’s Other Value Added Services revenue increased by $37 million year over year. One of the main drivers of such an increase was higher interest income on customer funds due to higher interest rates. Block itself made $7 million in revenue from customer funds as well.

Next, rewards is a great tool to keep consumers engaged. Consumers love to earn rewards and redeem them for other purchases. PayPal recently revamped their rewards program that unifies all PayPal products and offers consumers more ways to earn and redeem. However, since Venmo and PayPal are still two independent platforms, the new PayPal Rewards does not feature Venmo. If consumers are expected to use Venmo for payments, they will expect to be rewarded for such loyalty. Besides Venmo credit card’s rewards, Venmo offers cash back at qualifying merchants on Venmo debit card, but information on that is scant. Venmo needs to make the program more attractive and prominent. Yes, the low interchange rate on debit card transactions makes it expensive to fund rewards, but it’s also expensive, if not more, to acquire new customers and fend off Cash App and a host of other competitors.

Here are a couple of things that Venmo can do. First, link the credit card with the debit card, Any credit card rewards can be turned to cash on Venmo account that can be used to pay friends or purchase at stores with the Venmo Debit Card. This concept is not something new. It’s similar to what Apple has with Apple Card and Apple Cash. By making the credit card rewards immediately available, Venmo would give users a reason to use the Venmo app and debit card.

Second, because Venmo Credit Card is a co-branded card issued by Synchrony, Venmo must receive some compensation, either as share of interest and/or interchange income and finder’s fee for every new account. Financial reports by PayPal indicate that the compensation could run in the millions. Use that money to run marketing campaigns with a celebrity. I’d love to see Venmo try to do what Capital One did with Taylor Swift. Capital One generated a lot of accounts, interest and awareness with this campaign.

In short, Venmo is an incredible asset that PayPal has at its disposal. Investors place a premium on the company’s ability to monetize Venmo, but even the CEO is not happy with what they have done. Compared to Cash App, it’s under-monetized. PayPal needs to start making more progress soon because their competitors don’t stand still for them to catch up.

Weekly reading – 12th November 2022

What I wrote last week

My review of the US Bank Shopper Cash Rewards Visa Signature Credit Card

Business

($) What If Apple Made an E-Bike? On paper, the idea that Apple would change the e-bike/micromobility industry forever with its own product makes sense. The question is: how would an e-bike connect with the rest of the ecosystem? How would all devices complement one another? Apart from transporting a person from A to B, what utility would an e-bike provide?

The Russo Brothers Assemble: Inside AGBO, Their $1 Billion Studio, and When They Might Return to Marvel. Some insights into the entertainment industry

Why we’re leaving the cloud. I am not a fan of DHH, to say the least, but I appreciate his and his company’s perspective on this issue. Indeed, one of the biggest selling points of cloud providers is that you can save time and money renting their infrastructure. I am not saying that it’s impossible. But every buyer needs to do their homework and run a trial to see if that’s the case. My first-hand experience with our company’s transition to AWS is that we have a net positive, but you need to remember that most banks run on mainframes which are expensive to service in the first place.

($) Adobe Is Trying to Spend $20 Billion to Buy Back Its Swagger. I honestly don’t understand why people compared this to Facebook’s acquisition of Instagram. To me, because of the price tag, this deal looks similar to the $19 billion purchase of WhatsApp by Facebook. Nonetheless, I think there is a real chance that regulators would block this deal given the recent developments.

Stack Overflow CEO on how it became the world’s most popular programming site. A few stats on Stack Overflow: 50 million questions & answers, 100 million monthly visitors worldwide, 50 billion visits in the last 14 years, 15,000 organizations that use StackOverflow-for-Teams

Emergency SOS via satellite on iPhone 14 and iPhone 14 Pro lineups made possible by $450 million Apple investment in US infrastructure. There is innovation that doesn’t make headlines, yet improves lives. There is also innovation that grabs all sorts of attention, yet seems to be based on imagination than reality. Meterverse and this Emergency SOS, guess which one improves lives?

The global shipping industry is facing a new problem — too many containers. The demand for shipping dropped significantly, to the point that there are idle containers. I wonder if this is a sign that a recession is coming upon all of us.

Number One in Formula One. As much as I disliked Mercedes’ dominance in F1 the past decade, I have nothing but respect for their achievements because they were earned honestly. Toto Wolff is a magnificent team principal and his leadership lessons shared in this article are invaluable

Other stuff I find interesting

TSMC approaching 1 nm with 2D materials breakthrough. Any company or country still on chips bigger than 20nm is essentially years behind

US Traffic Safety Is Getting Worse, While Other Countries Improve. “The US underperformance in road safety is especially dramatical: 11.4 Americans per 100,000 died in crashes in 2020, a number that dwarfs countries including Spain (2.9), Israel (3.3) and New Zealand (6.3). And unlike most developed nations, US roadways have grown more deadly during the last two decades (including during the pandemic), especially for those outside of cars. Last year saw the most pedestrians killed in the US in 40 years, and deaths among those biking rose 44% from 2010 to 2020. That narrative is hogwash. For proof, look no further than Canada, an equally spacious and car-centric neighbor where the likelihood of dying in a crash is 60% lower.

The Car Safety Feature That Kills the Other Guy. Owning a truck is a waste of space & fuel and it increases risks of collision. For the lift of me, I never get used to sitting in my car next to a truck that is twice as big. “After decades of decline, U.S. road deaths flattened and then began rising about 20 years ago. Some 42,915 people died in crashes during 2021, a 16-year high. Notably, it was also 20 years ago that the American flirtation with SUVs and trucks became an all-out obsession. These vehicles first outsold cars in the U.S. in 2002; they have been gobbling up the market share ever since. SUVs and trucks may leave their occupants feeling safer, but they create grave dangers for everyone else on the street. A 2015 federal study found that an SUV is two to three times more likely to kill a pedestrian than a car is, and economist Justin Tyndall has tied the ascent of SUVs to an increase in pedestrian deaths, which hit a 40-year high in 2021. Cyclist deaths, meanwhile, rose 44 percent from 2010 to 2020.”

India has lost 70 million hectares of farmland since 2015. Climate irregularities which are likely caused by our carbon emissions severely impact India’s agriculture and food security. It could be a global theme one day in the near future

Stats

In highly polluted areas, or if plastic pollution continues to rise in the future, the whales could be eating 150m pieces a day

SEC obtained record $6.4b in monetary sanctions in past fiscal year

90% of electric vehicles sold in France in 2021 were two-wheelers

90% of new vehicles sold in Norway in 2021 were either electric or hybrid

With this credit card, you can earn more than $500 in the first year

US Bank recently announced a new exciting addition to their personal credit card line-up and it’s called US Bank Shopper Cash Rewards Visa Signature Credit Card. Here is what you will get with this card:

  • $250 bonus after spending $2,000 or more within the first 120 days of account opening
  • 6% cash back on your first $1,500 in combined eligible purchases each quarter with two retailers you choose. Every quarter, you’ll have to opt in and choose two retailers, up to 5 days before the quarter ends
  • 3% cash back on on your first $1,500 in eligible purchases on your choice of one everyday category (like wholesale clubs, gas and EV charging stations, bills and utilities)
  • 1.5% cash back on all other purchases. In the event that your spend exceeds the $1,500 threshold at the chosen retailers and accelerator categories above, any additional spend will earn $1.5%
  • $95 in annual fee with the first year’s fee waived
  • Ability to use Real-Time Rewards, which allows cardholders to turn purchases into rewards and redeem rewards on purchases in real time
  • Ability to use US Bank Extend Pay, which is the bank’s Buy Now Pay Later feature, for a monthly fee of around 1.6% of the balance
The list of eligible retailers. Source: US Bank

From a cardholder perspective, this is a seriously good card. The list of eligible retailers is impressive, featuring the most popular stores for the majority of people in America. For the sake of simplicity, let’s talk about what I think will be the most common scenario: groceries at Walmart. Spending $500 a month on groceries at Walmart is common for a family of four people. If a household’s children are all adults and everybody shares one card, it will be even easier to clear the threshold. At 6% cash back, cardholders can get back $90 on $1,500 spend every quarter or $360 every year. Even if you are a single user and spend around $1,000 on groceries at Walmart, it will still result in $240 in annual cash back. Either way, the rewards easily clear the annual fee of $95.

In addition, if you spend $200 on bills & utilities and $100 on gas every month, you can get back $9 a month or $108 a year in cash back. I drive a sedan and don’t rack up mileage, so I spend like $40/month on gas. But to truck drivers or SUV owners, this card presents a great saving opportunity. In short, with all the rewards combined with the $250 bonus offer, a cardholder can earn at least $500 in the first year with this credit card.

From a perspective of somebody who works in the credit card industry, I am excited about this new product and I would love to know how US Bank could make money from it. Let me explain. The 6% cash back category is surely a money loser for the issuer because there is no consumer interchange rate that exceeds even 3.5%. The magnitude of the loss depends on which merchants cardholders pick. Amazon and Walmart typically have an interchange rate of 0.7%, meaning that US Bank would lose $5.3 in rewards on every $100 transaction. Other retailers have high interchange rates, but they will be around 2-2.5% at the most. While EV Charging has an interchange rate of 3%+, meaning that US Bank will break even or generate some marginal revenue on this category, wholesale clubs, gas and utilities are all low-interchange categories. All other purchases that earn 1.5% in rewards should have, on average, negligible net revenue/loss for US Bank. Throw in the one-time $250 bonus offer and you can see why US Bank will definitely lose money on rewards.

The issuer hopes to negate some of the impact with the annual fee of $95, but like I explained above, it will not cover all the rewards if customers are savvy enough. The real driver of revenue and profit for US Bank will be the interest income on APR of up to 28.24%. In the credit card industry, we use the term “Transactors” to describe consumers that pay off their balance regularly and do not revolve. US Bank will get no luck from them. I suspect that the bank will try to acquire as many non-Transactors as possible, hoping that cardholders will appreciate the benefits and spend more than they can afford. To this end, there are three factors that will determine the success of this credit card:

  • Keep cardholders from churning before the first annual comes up. There will be a lot of gamers who sign up for rewards and bonus before leaving to avoid having to cough up $95 in annual fee
  • Educate cardholders on the benefits and how they can have a net gain despite the annual fee. That’s why there is a rewards calculator embedded on US Bank’s product page. But they should do more. Use influencers. Make the use of this credit card as relevant as possible to an average Joe. Explain to them why they should pay an annual fee to get this card instead of other cards with 5% cash back and no annual fee
  • Control charge-off

I already saw online comments saying that the $95 annual fee was a dealbreaker. I totally understand the sentiment, but from an issuer perspective, the annual fee is what brings this card from “impossible to make money” to “having a chance of profitability”. As a consumer, I probably won’t sign up for this card any time soon as I don’t have a big-item purchase lined up and because my spending profile will not benefit me. As somebody who works in the credit card industry, I am excited to see what unfolds next for this product. I haven’t seen anything like it on the market for a while. It’s refreshing and definitely gives us some thoughts on how to construct our portfolio.

Weekly reading – 5th November 2022

What I wrote last week

Apple Earnings

Small but important things

Business

How Google’s Ad Business Funds Disinformation Around the World. A large scale investigation into how Google’s Ads benefit sites that distribute misinformation in non-English speaking countries. I understand that this problem is not easy, but Google is known for engineering prowess and this is an engineering problem. If ads still shows up on sites flagged as misinformers, it’s because someone decides to turn a blind eye on them. “ProPublica also scanned close to 10,000 active articles that fact checkers in the three Balkan countries flagged for false claims since 2019. Just over 60% were earning money with Google. The articles included a range of falsehoods about national politics, the pandemic, vaccines, the war in Ukraine and other topics. Dejan Petar Zlatanovic operates Srbin.info, a Serbian website that publishes pro-Kremlin propaganda copied from Russian state media, election conspiracies about the U.S. and anti-LGBTQ content. Its homepage features a prominent hyperlink directly to the official Kremlin website. Google ads abound there and on article pages. Zlatanovic said in an email that Srbin.info earns between $5,000 and $7,000 per month, with Google ads providing a key portion of the revenue.

The Hype Cycles of Venture Capital. Our society praises monumental wins of venture capitalists passionately and holds those men and women in high regard. But I don’t see the same vigor in criticisms when they fumble millions of capital on new, exciting and…useless ideas. Anyone remember Clubhouse? Or Bird?

Inflation – Stealing From Savers. The headline is that inflation is not going away any time soon and investors will have a hard time to earn sizable returns

After leading $20 billion Figma deal, Adobe’s David Wadhwani is in prime spot to be next CEO. As an Adobe shareholder, I feel good reading this article. Who’s better to succeed the current CEO than the guy championing the subscription business model and having the credentials of leading AppDynamics to be acquired by Cisco.

($) Big Tech’s Dirty Supply Chains Undercut Climate Promises From HQ. “Amazon.com Inc., Microsoft Corp. and Alphabet Inc. have pledged to run their own operations on 100% clean power. But their suppliers — the lesser known companies that make the key components of hit products like the Kindle, the Xbox or Pixel mobiles — remain deeply reliant on fossil fuels. Twelve of the 14 top suppliers get on average 5.4% of their energy from renewable sources or don’t disclose, data from a Greenpeace report released Friday showed. Taiwan’s TSMC is sucking up as much electricity as Sri Lanka’s 21-million population and is expected to use up 12.5% of the island’s annual power consumption by 2025. More than half of Taiwan’s energy is generated from coal and fossil fuels. In South Korea, home to another critical chip-supplier, SK Hynix, the story is similar. The company’s chip factories consume power equivalent to 1.6 million South Korean households and more than 60% of the country’s power comes from burning coal and natural gas.”

JPMorgan Chase wants to disrupt the rent check with its payments platform for landlords and tenants. This is an exciting new product from JP Morgan. It’s so frustrating that tenants have to pay by checks every month because landlords refuse to upgrade their infrastructure. I myself was asked to provide a check as collateral the last two times I tried to book a facility in my apartment building. I abandoned the booking simply because I refused to go to a branch just for a check. For JPMorgan Chase, this can be a strategically great move. At $500 billion in rent payment volume annually, even 0.2% of interchange and/or processing fee can bring in an extra $1 billion in revenue. Landlords that park their rent payments in a Chase account can help the bank get more deposits to fund their more lucrative loan-originating business. Last but not least, even if JPMorgan Chase doesn’t require landlords or tenants to be a customer of the bank, this new platform can serve as a tool to scout new prospects. Think about it this way. If the bank knows the address and rent-paying behavior of a prospect, it can leverage that data to craft a profile and run a marketing campaign toward that profile accordingly. That information is first party, reliably accurate and NOT easy to have.

This is how much more Apple Music pays artists than Spotify [Video]. I wonder what non-disclosure agreements these streaming services have with artists. But this is damning to Spotify. If a few more artists come out to back up this revelation, they will be under pressure to increase payout and that would mean higher expenses and less margin. Investors will not like that

Apple CFO talked about the small scale of his Finance team and how efficient they are

Other stuff I find interesting

How the New York City steam system works. The story of steam actually begins in Ancient Rome, where enterprising Romans were already building steam pipe systems for heating buildings and baths. The technology spread to the rest of Europe, but it was in the United States during the late 19th century. Inventors and businessmen turned it into a commercially viable heating option for towns and cities. New York was the first major city in the U.S. to have a steam system and still has the largest one to this day. In fact, if you add up the next five largest steam systems in America, it’s still smaller than New York City’s.

In Greece’s largest port of Piraeus, China is the boss. Europe must be mindful of these investments in key infrastructure by China. If there is opposition to China getting semiconductor technologies from the US, why shouldn’t there be caution when it comes to key infrastructure?

Why Switzerland built a 2-kilometer-long train. I am marveled by the fact that there is a 2km-long train out there. I wouldn’t get on board if the train was operated in many countries, including Vietnam. But since this is the Swiss we are talking about, I’d give it a shot.

The enduring sexism of India’s tech industry. With 1.3 billion people in population and a big portion of that as women, India would be even more competitive if they could foster a culture more liberating and friendly towards women

Vietnam is luring tech giants out of China with flashy infrastructure projects. If our country just provides lands and labor, there will be little transfer of technological, commercial or scientific knowledge. Don’t get me wrong. It’s good to increase the GDP and all that for Vietnam, but I’d prefer us taking a page out of Singapore’s playbook.

($) The Metals for Your EV Are Stuck in a 30-Mile Traffic Jam. This is an eye-opening account on how copper is transferred from mines to ports in Africa. My gosh, what a tough gig it is. The whole continent is hungry for infrastructure investments that will make thousands of lives easier and improve commerce. Rich countries wishing to establish influence should pay attention and act before China does, if they haven’t already

Stats

Meta’s Reality Labs is projected to cost as much as the Apollo Program, the very one that landed humans on the Moon

37% of small business owners in the U.S. were unable to pay their rent in full and on time in October

Small but important things

Below are a few short clips that I found profound yet easy to understand. Hope you’ll enjoy them as much as I do

The value of independence

In this clip (starting 31:30 and I tried to make the embedded video start at that point), Morgan Housel talked about his own experience with the independence and freedom that money provides. The older I grow, the more I take this lesson to heart. Fortunately, my wife shares the same perspective and that makes everything a bit easier.

Enough

My wife and I took a walk this evening to enjoy an awesome weather that is going to be sorely missed in a month. We talked about what would have been like if we were living in the 1920s. There would be no Internet. We would have no Google. We would have to look up things on newspapers. We would have to write to our family back home in Vietnam instead of Facetiming. We would be in more danger because drugs and medical procedures were much less advanced, etc. We both came to a conclusion that we were happy to be where we are. A lot of people that I interacted with asked me why I chose Omaha and why I haven’t moved to a bigger city. Many of them actually left themselves. We have a different opinion. We like it here. It’s not too hectic nor is it too expensive. It’s quiet and if we look long enough, we can always find something to do. We may change our minds in a few years, but for now we are content. We have enough. Which is what Morgan Housel talks about here:

What is winning?

Hasan Minhaj brought up a great point in this clip. We idolize celebrities and put them on a pedestal. Many of them earn that respect, love and adulation. There are dedicated fans who know every achievement and every single detail of an athlete’s career. There are even university courses on some superstars. But how much do we talk about the other side of the equation? How much do we talk about the strained relationship, the mental breakdown or the sacrifices? Envy is arguably the worst sin. If you envy someone, envy the whole package. The good and the bad. Which is something that I am working hard on every day.

We and everything we do will fade. So take it easy

I am not a fan of Naval on Twitter. In fact, I blocked him. But that doesn’t negate the fact that he made a great point here. Stand in a forest, an ocean or a mountain and you’ll see how small we are against nature. Zoom it out to the whole planet and we become microscopic. Zoom it out a bit further and we’re absolutely nothing. As great as some civilizations and great individuals in the past, they are all gone and some of their work will already fade eventually. We won’t be any different and that’s life. Knowing that brings a whole new perspective in life.

Apple Earnings – The Resilience & Effectiveness Of Apple

Last Thursday, Apple announced its Q4 FY2022 earnings results as follows

  • Revenue: $90.15 bn vs $88.9 bn estimated. Up 8% year over year (YoY)
  • Gross Margin: 42.3% vs 42.1% estimated. Essentially flat YoY
  • iPhone revenue: $42.63 bn vs $43.21 bn estimated. Up 9.7% YoY
  • Mac revenue: $11.51 bn vs $9.36 bn estimated . Up 25.4% YoY
  • iPad revenue: $7.17 bn vs $7.94 bn estimated. Down 13.6% YoY
  • Other Products revenue: $9.65 bn vs $9.17 bn estimated. Up 9.9% YoY
  • Services revenue: $19.19 bn vs $20.1 bn estimated. Up 5% YoY
  • EPS$1.29 vs. $1.27 estimated

On the surface, it looks like a routinely great quarter for Apple, but there are a few points worth calling out.

Apple's revenue growth
Figure 1 – Apple’s revenue growth

First, Apple got hit with a 600 basis point of unfavorable foreign exchange impact due to the strength of the dollar. Had the currency exchange stayed constant, Apple’s revenue growth would likely have been two-digits and could have gone up to as much as 14%. Despite significant foreign exchange headwinds, product margin was 35%, flat compared to Q3 FY2022, and 100 basis point up year over year. This indicates Apple managed to gain efficiency and sell more expensive products. To investors who care about how a company is run, this is a good sign.

Second, the stickiness of iPhone. Since Q4 FY2020, iPhone revenue has increased year over year every quarter. In FY2022, iPhone revenue grew by 7%, on top of the monstrous 39% growth achieved in FY2021. As a billion business worth more than $200 billion, that’s no mean feat. More impressively, the numbers could have been even rosier. According to Tim Cook, the company has been facing and still faces supply chain constraints for the popular iPhone 14, iPhone 14 Pro and iPhone 14 Pro Max. Had Apple had enough parts to meet the demand, they could have added a couple of more billions to their top line. In the time of unprecedented inflation and uncertain macro-economic conditions, this shows how much consumers love their iPhone and considers it more of a necessity than a luxury.

Apple business segments' revenue growth
Figure 2 – Apple business segments’ revenue growth

Next, Services grew 5% YoY and slightly missed analysts’ expectation. Adding the estimated foreign exchange impact of 600 basis points, Services would have grown by 11%, beating the consensus. Since 2018, Services has grown by double digits every year, reaching $78.1 billion in annual revenue in FY2022, up from almost $40 billion in 2018. Compared to previous year, FY2022 posed a lower annual growth, but there are levers that Apple can pull:

  • Apple recently announced price hikes on Apple Music, Apple TV+ & Apple One. The company explained that the price increase for Apple Music is due to more payouts to artists while that for Apple TV+ is fair considering the amount of content that Apple has added since the launch of the streaming service. As the flagship overarching subscription, of course, Apple One will also be more expensive. I think the justification makes sense because if Apple REALLY wanted to increase Services revenue and abuse its power, the company would raise iCloud’s prices. There are alternatives to Apple Music and TV+, but there is nothing to replace iCloud and no Apple user I know doesn’t buy additional storage. In short, this is not a move out of desperation.
  • Apple is loading more ads on the App Store. In their 2022 annual report, the company already cited advertising as one of the main drivers behind Services’ growth. Ads revenue is great and all, but too many ads will harm the user experience. Plus, there is already backlash from developers who saw online gaming ads placed next to their apps. Hence, Apple needs to be careful and considerate about pushing their advertising division
  • Apple Business Essentials. There has been no disclosure from Apple regarding this service, but I suspect it will come to the fold more in the next couple of years

Last but not least, I am really pleased with how Apple manages its costs. The gross margin profile of Products, Services and the whole company have been very stable in the last four years, despite Covid-19, the war in Ukraine, the withdrawal from Russia, the supply chain challenges and other macro-economic events. Operating expenses, including R&D and SG&A, as % of total revenue never exceeded 8% in the last four years. Based on the commentary from the executives, that should be the case for the next twelve months:

When we look at our capex, as you correctly said, I mean, we’ve been fairly stable, and I think our capital intensity is really very good. We have three major buckets in capex for the company. We have certain dedicated tools for the manufacturing facilities. We had some spend around data centers, and we have spent around our office facilities around the world. We obviously monitor all of them. There is nothing unusual that we see for the next 12 months.

When a company reaches a trillion dollar mark in valuation and generates billions of dollars in cash flow every 90 days, there is understandably a risk of being negligent on cost control. Think about yourself. Do you allow yourself more luxuries and impulsive purchases now than you did as a student and when you had lower income? From this perspective, Apple has been a disciplined and prudent steward of shareholder capital. To some extent, I don’t think you can make the same point about other big techs, such as Amazon or Facebook.

Apple's gross margin
Figure 3 – Apple’s gross margin

In short, this quarter’s results were not the most impressive that Apple has ever put out. They were just routinely and boringly good from my perspective and for the reasons I listed above. Even though there is no headline-grabbing debate-fueling stuff such as the investment in Reality Labs by Facebook, I prefer a stable and effective management that keeps their feet on the ground and produces results for shareholders.