Weekly reading – 4th February 2023

What I wrote last week

Banks plan to compete with Apple Pay & PayPal

X1+, a credit card for when things go wrong on travel

Business

Understanding Tesla’s operating leverage. A good post on how Tesla managed to increase its operating margin while vehicles prices dropped

($) Americans Are Gobbling Up Takeout Food. Restaurants Bet That Won’t Change. Quite an interesting trend in the restaurant industry. I have no idea how it will go because my personal experience is conflicted. My wife and I are often marveled at the long line in front of every Chick-fil-A store that we pass by. On the other hand, I saw fast food stores with no line, no car in the parking slot and very few diners. Takeout may increase sales for restaurants, as long as they survive

Aldi, H-E-B among growth leaders in 2022: Report. “Small-format stores are cheaper to build and require less land or space to buy or lease. This allows access to more markets than a larger-format store would. Furthermore, as retailers continue to invest heavily in e-commerce, these smaller stores can act as fulfillment centers for online orders.

($) Bed Bath & Beyond Used to Be Great. These Two Are Why. Bed Bath & Beyond’s founders serve as an example of honesty, authenticity, frugality and customer orientation. They are not afraid to admit their own mistake, including not realizing the potential of the Internet. At first, when the company’s budget was tiny, the two men used cardboard boxes as trash bins and still make sure both sides of scrap paper are used. I also found it awesome that they finally learned to let go of their creation after being pushed out.

TikTok is driving an offline lift in sales for some brands. Very helpful and interesting examples of how TikTok is helping brands drive sales.

Other stuff I found interesting

First use of Apple Emergency SOS in B.C. may have saved two lives. Apple’s innovation is increasingly proven valuable in real-life crises. Even one of these cases is even worth working on

($) Japan, Netherlands Agree to Limit Exports of Chip-Making Equipment to China. A great triumph for the Biden administration in hampering China’s ambition in this critical area. Without the most advanced materials and technologies from ASML, Nikon and other important manufacturers, China won’t be able to scale their semiconductor operations and bridge the gap to the US

($) The U.S. Consumer Is Starting to Freak Out. Signs of the troubling times to come are here

The highest rail route in northern Europe. “Connecting Norway’s stylish capital with its most picturesque city, the 496km, 39-station Oslo-Bergen railway is one of the world’s most beautiful train journeys.”

The Antidote to Envy. Understanding yourself is the best way to avoid envy

Package Deal: In 1915, Coca-Cola had many imitators. Then it designed a patented bottle nobody could copy. The origin story of the iconic Coca Cola bottle is a fascinating one.

Stats

Mount Olympus on Mars is the tallest mountain in the Solar System, three times as tall as Mount Everest

Customers loaded $3.3 billion onto Starbucks gift cards during the quarter ending December 31, 2022

Mount Washington in New Hampshire experienced wind chill at -108 Fahrenheit degrees or -78 Celsius degrees. Lowest ever recorded in the US

Source: JLL Research
Source: 9to5Mac

X1+, A Credit Card For When Things Go Wrong On Travel

There is a new credit card on the market for when things go wrong on travel.

X1 introduced a new iteration of its credit card portfolio, the X1+ card. Here are a few headline attributes:

$75 annual fee card.

Worldwide Lounge Access for Flight Delays: X1+ will be the first U.S. Visa credit card to offer complimentary lounge passes worldwide for members and up to 4 additional passengers if a flight is delayed by one hour or more.

On-Demand Lounge Access: X1+ will be the only credit card to enable on-demand lounge pass purchases, so cardholders can access more than 1,000 Priority Lounges.

Smart Baggage Protection and Enhanced Coverage: If baggage is delayed, cardholders get $100 per day in protection for 3 days. If baggage is lost, cardholders get $3,000 in protection per trip. Trip cancellation coverage is up to $5,000 per person per trip, and the card acts as the primary insurance for domestic and international car rentals. The card also comes with enhanced purchase protection at $10,000/occurrence, including Porch Piracy, with a limit of $50,000 per cardholder.

Rewards

  • 2X points on every purchase regardless of category
  • 3X points every time you spend $1,000 in a month
  • 4X points on Expedia, Hotels.com and VRBO
  • 4X, 5X and even 10X points for every referral who gets a card
  • Up to 10X points at leading online stores such as Apple, Nike and Sephora when cardholders shop in the X1 App

Let’s analyze these benefits and see if it’s worth paying $75 a year.

2x points on every purchase is similar to set-and-forget cash back credit cards with no annual fee on the market. Examples include PayPal Mastercard Credit Card, Apple Card on Apple Pay, Synchrony Premier World Mastercard, FNBO Evergreen and Wells Fargo Active Cash Card. Because these cards don’t require any annual fee, the 2x cash back on every purchase becomes table stakes, not what consumers should pay $75 a year for. Additionally, some of the aforementioned cards such as FNBO Evergreen or Active Cash Card also has an intro and a bonus offer. To compete, X1+ must bring something else to the table.

3X points every time a customer spends $1,000 a month is an intriguing benefit. The fine print on rewards terms stipulates that the higher rewards earn rate only applies for spend between $1,001 and $7,500 in a calendar month. Any dollar beyond the $7,500 mark will earn 2 points. Here is a concrete example. If you spend $1,000 within the first month of Jan 2023, you’ll earn 2x points on that amount. Between the 6th and 25th of January, you spend another $6,500 which will accrue 3x points. For the last 6 days of the month, you spend another $500 which earns 2x, instead of 3x, points.

Based on those terms, if a customer wants the extra 1 point per dollar to pay for the annual fee, they will have to spend at least $750 a month for 10 months. The math is that $750 (the amount after the first $1,000) x 1 (the additional rewards earn rate) x 0.01 (100 points are worth $1) x 10 (number of months) = $75. Let’s say that a customer narrows down his or her next credit card to one between X1+ and one 2% cash back with a $200 bonus and no annual fee. Choosing X1+ would mean potentially losing $275. How can they make that up with the extra point from X1+? By spending at least $3,750 a month. In that case, after 10 months, they will recoup that investment ($2,750 x 1 x 0.01 x 10 = $275).

As a result, consumers who plan to spend between $1,750 and $3,750 on a credit card for the better part of a year will find the 3x points benefit of X1+ worth paying $75 in annual fee for.

Reading the press release, I suspect that access to lounges is the leading selling point of this credit card. Although the press release doesn’t mention which lounges X1+ cardholders may have access to, NerdWallet reports that it’s none other than Priority Pass Lounges. Here are a couple of things about these lounges:

  • If you reside in the US, it costs $99 a year to join the Priority Pass community and a further $35 for each visit to a lounge. Pay $329 a year and you can get 10 complimentary lounge visits. $469 a year will get you unlimited free lounge visits
  • Priority Pass Lounges are located at major airports in the US and numerous locations in the world
Priority Pass Lounge Map. Source: loveswah
Priority Pass Fees. Source: Priority Pass

Based on how Priority Pass Lounge access is priced, a couple of visits are already worth the annual fee, especially if you don’t fancy joining the Priority Pass network every year. The catch here is that complimentary access only comes when your flight delay lasts more than an hour. In other words, you have to rely on things going wrong to enjoy this benefit. According to the Bureau of Transportation, 20% of the domestic flights in US between January and October 2022 had at least a 15-minute delay. Once data for the holiday comes in, I suspect the share of delayed flights will increase due to unprecedented delays and cancellations that airlines had to make. It’s safe to assume that a consumer has like 5-10% of having a flight delayed for more than an hour.

As a result, X1+ cardholders that don’t travel frequently may not have a chance to use this benefit that the card offers. But compared to the high annual fee that other premium travel credit card like Amex Platinum command, it’s a reasonable trade-off: a low annual fee with no guaranteed lounge access for a high annual fee with guaranteed access. X1+ is clearly positioned as an alternative for the premium credit cards already on the market.

Other benefits such as baggage delay or trip cancellation insurance is at best another table stakes and not differentiated from competition. Plus, these benefits only kick in when customer trips hit speed bumps, reducing their appeal to customers who likely prefer smooth travel.

In short, X1+ has some pretty unique selling points such as access to lounges or 3x rewards. The card, in my opinion, appeals most to high-spending folks that can spend at least $1,750/month for most of a calendar year. Another group that may find this card attractive is frequent travelers that want peace of mind yelt balk at paying a high annual fee upfront. If X1 manages to add more names to the list of 4x rewards merchants, the card will become more attractive. I suspect that the 4x merchants subsidize rewards expenses in exchange for additional sales. Once X1+ grows to a certain point, it will be easier to sign up more vendors.

Banks plan to compete with Apple Pay & PayPal

Per WSJ:

Wells Fargo, Bank of America, JPMorgan Chase and four other banks are working on a new product that will allow shoppers to pay at merchants’ online checkout with a wallet that will be linked to their debit and credit cards. The digital wallet will be managed by Early Warning Services LLC, the bank-owned company that operates money-transfer service Zelle. The wallet, which doesn’t have a name yet, will operate separately from Zelle, EWS said.

EWS’s owner banks are also trying to cut down on fraud. Customers using their wallet wouldn’t have to type in their card numbers, which can raise the risk of fraud and rejected payments that result in lost sales. 

The banks are still ironing out the details of the customer experience. It likely will involve consumers’ typing their email on a merchant’s checkout page. The merchant would ping EWS, which would use its back-end connections to banks to identify which of the consumer’s cards can be loaded onto the wallet. Consumers would then choose which card to use or could opt out. 

Banks are reacting to the threats from PayPal and especially Apple. The tech giant is moving deeper and deeper into the consumer banking space with the imminent launch of a savings account and BNPL product. Incumbent banks are concerned that Apple will control the customer relationship, rendering banks’ offerings a stepping stone or accessories at best. In “Owning the relationship with your customers. A look at the controversial case of Apple“, I wrote:

Apple is at the peak of their power and having the best relationship ever with users, a relationship that involves other parties such as app developers. The company invests a lot of resources into cultivating the relationship with both end users and app developers. As long as the former is strong (apparently it is now given its strong financial results), it gives Apple enormous bargaining power over anyone who wants to leverage such a relationship. To reduce Apple’s power, the most logical way is to weaken the bond they have with the end users by offering a better alternative, though it’s by no means an easy ask.

There is virtually nothing that these banks can do to stop consumers from buying Apple hardware. Manufacturing a smartphone is not in their circle of competence. As a result, the only way to weaken the bond that Apple forges with consumers is to offer an alternative to Apple Pay. Do that and banks can hope to wrestle back the control over customer relationship. While the plan makes sense, there are major concerns over its practicality.

The first issue is fraud. EWS operates the P2P network Zelle, which enables money exchange between users’ bank accounts. Though popular, Zelle has seen a concerning amount of fraud which attracted criticisms from lawmakers such as Elizabeth Warren. I was personally told that my employer, a bank, hesitated to offer Zelle mainly because of fraud. If EWS cannot solve fraud on Zelle and there is little information on how the new unnamed mobile wallet will minimize fraud, what is to make us believe that will actually happen?

The advantage that Apple has in this area is that their hardware is built as a fraud deterrent. Any Apple Pay transaction needs to be approved either with a Touch or Face ID. And we can bet that Apple won’t make a competitor a native wallet on their devices like Apple Pay.

An argument can be made that since the new wallet challenger will operate like PayPal, which is a massive brand, surely it can replicate PayPal’s success. Well, that’s where the second issue lies. PayPal has a giant network of 380 million consumer and 35 million merchant accounts. Merchants like PayPal because it can help with conversion, while consumers like PayPal because it is widely accepted. One cannot live without the other. How can big banks convince thousands, if not millions, of merchants to display the new checkout button?

To do that, banks first have to convince consumers to use the new shiny wallet. Starting with credit cards is smart since that’s where rewards are. But what about trust? If consumers are unfamiliar with the new wallet’s name, whatever it may be, will they choose it instead of the more established names like PayPal or Apple Pay? Would you choose to pay with “Minh’s Pay” if I had a wallet after my name? That in and of itself is not an easy task.

JPMorgan launched Chase Pay in November 2016, about two years after Apple launched Apple Pay. It’s beyond dispute to say that Apple Pay is a much more successful and popular mobile wallet than Chase Pay. Remember that JPMorgan Chase is one of, if not, the biggest bank in the US. Even they couldn’t get its own proprietary wallet to compete with Apple Pay or PayPal. What are the odds that several banks whose interests may not always align can get the job done when they are several years behind?

Weekly reading – 28th January 2023

What I wrote last week

Layoffs, accountability and leadership

Book Review: Deep: Freediving, Renegade Science And What The Ocean Tells Us About Ourselves

Business

This letter from Patient Capital on Google is a great primer on the giant tech company. While I agree with the tenet that Search is the cash cow for now and YouTube/Waymo/Cloud offers future growth, I don’t see any coverage on the threats: competition, organizational challenges and regulatory scrutiny

Amazon’s drone delivery unit hit with layoffs just as 10-year-old project finally launches. There is no guarantee that drone delivery program will be a game changer for Amazon. Even that possibility is in jeopardy as Amazon laid off hundreds of employees, including many in Prime Air, which operates the program.

Bad batteries, software glitches: VinFast’s EV drivers say they feel like guinea pigs. Despite grandiose promises, ambitious goals and loud announcements, drivers encountered serious software glitches and faulty batteries with VinFast’s EVs. As a Vietnamese, I am happy to see a national brand take it to the world stage, in an industry that Vietnam has never excelled in. The problem is that the one company that has the vision and resources to do it is not known for sustainable growth. The company tends to throw money at a problem, scaling operations up at a breakneck speed without much regard for details. It stood up resorts touted to be luxurious in less than a year. As you may imagine, such properties are not up to par in terms of quality. It’s not rare to hear complaints about how VinGroup’s residential projects deteriorated only after a few years. That’s why I was not surprised to read about their problems with EVs. I never imagine it easy to sell EVs, but the field is very competitive. What evidence is there to prove that VinGroup has the core competencies to compete and win on a global scale?

How the Spotify layoffs impact its podcasting business. It makes sense that Spotify is trying to make its podcasting business leaner and more efficient. However, there are two concerns that stand out from this article for me. The first is that Spotify replaced the head of content, who has a lot of experience and Hollywood connections, with an operations guy. That doesn’t instill much confidence in a shareholder like myself. The second is that Spotify hasn’t been able to incorporate the tech stacks of all the companies it acquired. That leaves synergies and saved expenses on the table. What’s the holdup?

Meta Embraces AI as Facebook, Instagram Help Drive a Rebound. “Indeed, for all of Meta’s efforts to rebrand itself, the core Facebook “Blue” app remains its workhorse. While outside financial analysts have generally estimated that Instagram accounts for between 40% to 50% of the company’s ad revenue, internal statistics viewed by the Journal show that Instagram generates a little more than 30%—and it isn’t rapidly catching up. Making money on Reels remains an additional hurdle. The video feature’s rapid takeoff created a near-term problem: Because ads in Reels videos don’t currently sell for as much as those sold against regular posts and stories, Reels’ growing share of content consumption was denting ad revenue. To protect the company’s earnings, the company cut back on promoting Reels, which lowered watch time by 12%.”

The oral history of how Priceline acquired Booking.com. Expedia made one of the biggest mistakes in the travel industry’s history by not purchasing Booking.com when they had a chance. In fairness, the business models were quite different, but the price to pay is too high

Other stuff I find interesting

Somebody was kind enough to compile and share a 140-slide deck on France’s tech landscape

Inside CNET’s AI-powered SEO money machine. “Under the two-year-old management of a private equity company called Red Ventures, CNET’s editorial staff has often been left wondering: was this story written by AI or a co-worker? Even today, they’re still not sure. “I don’t lay any blame at CNET’s or its masthead’s feet,” one former staffer says. “This is all due to the machinations of the greater Red Ventures machine, and its desire to squeeze blood from a stone.”

($) Little-Known Surveillance Program Captures Money Transfers Between U.S. and More Than 20 Countries. “Hundreds of federal, state and local U.S. law-enforcement agencies have access without court oversight to a database of more than 150 million money transfers between people in the U.S. and in more than 20 countries, according to internal program documents and an investigation by Sen. Ron Wyden.” I don’t dispute the role of monitoring money transfers overseas in tackling crimes and terrorism. It’s a legitimate purpose. However, it’s very disturbing when every law enforcement agency can gain access to citizens’ sensitive data without a court order. Is data even anonymized? That’s just gross negligence and governmental overreach

Welcome to Hillstone, America’s Favorite Restaurant. “It’s never going to win a James Beard Award. Or try to wow you with its foam experiments or ingredients you’ve never heard of. But it is the best-run, most-loved, relentlessly respected restaurant in America. And, oh yeah, Danny Meyer, David Chang, and Shaq all agree. Welcome to Hillstone.”

Seaweed researchers find bright future for underwater crop. It’s fascinating to learn that seaweed could help reduce carbon emissions and fight climate change.

Stats

Axios’s subscription service, launched in Jan 2022, garnered 3,000 subscribers and $2 million in revenue in the first year

7% of US households used a new streaming service in Q4’22

“Global venture funding reached $415.1B in 2022, marking a 35% drop from a record 2021.”

Source: Twitter

Book Review: Deep: Freediving, Renegade Science, and What the Ocean Tells Us about Ourselves

What do we know about the ocean?

That’s the question the book “Deep: Freediving, Renegade Science, and What The Ocean Tells Us About Ourselves” tries to answer. As a journalist, James Nestor was assigned by Outside Magazine to cover the 2011 Individual Depth World Championship. It is arguably the biggest event for those that love freediving which was and still remains an unpopular sport. Fascinated and intrigued by what transpired at the event, the author started to learn more about freediving, the ocean and the fantastic world under the water that we, still to this day, know quite little about.

This book chronicles James’ journey from learning about the beauty as well as horror of freediving to how our body reacts to being hundreds of feet deep in the water, how dolphins & whales communicate and the theory that human life originated from water. James filled the pages with numerous scientific facts and theories, the results of hours of field research that did not lack of danger. Scientific books can be a bit dull, but I found myself glued to the author’s stories, from start to finish. James managed to find a sweet spot where he could be a teacher educating us on science and simultaneously a story teller with an exciting adventure to share.

James would be the first to admit that his book would cover “a sliver of the current research on the ocean”. Yet, I learned a lot from his work and writing. If you want to immerse yourself in the science of freediving and the ocean, have a read. I am sure you’ll learn a thing or two! Here are some of the things I took note

“The term Master Switch of Life was coined by physiologist Per Scholander in 1963. It refers to a variety of physiological reflexes in the brain, lungs, and heart, among other organs, that are triggered the second we put our faces in water. The deeper we dive, the more pronounced the reflexes become, eventually spurring a physical transformation that protects our organs from imploding under the immense underwater pressure and turns us into efficient deep-sea-diving animals. Freedivers can anticipate these switches and exploit them to dive deeper and longer.”

“As it turns out, the tradition of splashing cold water on your face to refresh yourself isn’t just an empty ritual; it provokes a physical change within us.”

“I discovered that we’re more closely connected to the ocean than most people would suspect. We’re born of the ocean. Each of us begins life floating in amniotic fluid that has almost the same makeup as ocean water. Our earliest characteristics are fishlike. The month-old embryo grows fins first, not feet; it is one misfiring gene away from developing fins instead of hands. At the fifth week of a fetus’s development, its heart has two chambers, a characteristic shared by fish. Human blood has a chemical composition startlingly similar to seawater. An infant will reflexively breaststroke when placed underwater and can comfortably hold his breath for about forty seconds, longer than many adults. We lose this ability only when we learn how to walk.”

“At sixty feet down, we are not quite ourselves. The heart beats at half its normal rate. Blood starts rushing from the extremities toward the more critical areas of the body’s core. The lungs shrink to a third of their usual size. The senses numb, and synapses slow. The brain enters a heavily meditative state. Most humans can make it to this depth and feel these changes within their bodies. Some choose to dive deeper.

At three hundred feet, we are profoundly changed. The pressure at these depths is ten times that of the surface. The organs collapse. The heart beats at a quarter of its normal rate, slower than the rate of a person in a coma. Senses disappear. The brain enters a dream state.

At six hundred feet down, the ocean’s pressure—some twenty times that of the surface—is too extreme for most human bodies to withstand. Few freedivers have ever attempted dives to this depth; fewer have survived.”

If you could take your lungs out of your chest, they are completely flexible and you could blow them to whatever size,” she says, then she puffs up her chest and exhales. What stops the lungs from expanding is the musculature around the ribs, chest, and back. Through stretching and breathing exercises, freedivers develop up to 75 percent more lung capacity than the average person. Nobody actually needs this extra capacity to start freediving, but, like a larger tank of gas, it can help you go deeper and stay under longer.”

“In the water, the deeper we go, the more the pressure increases and the more the air contracts. Seawater is eight hundred times denser than air, so diving down just ten feet causes the same change in air pressure as descending from an altitude of ten thousand feet to sea level. Anything with a flexible surface and air inside it—a basketball, a plastic soda bottle, human lungs—will be at half its original volume 33 feet underwater, a third of its original volume at 66 feet, a quarter at 99 feet, and so on.”

“Three hundred feet is the halfway point to the photic zone. Even in the clearest oceans, with blazing sunlight overhead, visibility at this depth is about .5 percent of what it is at the surface, so the water is perpetually gray and hazy. Without artificial lighting, you can see maybe fifty feet in any direction. Because the light is so diffuse, all directions at –300 feet look the same”

“Getting down to this depth is arduous and often dangerous. Scuba divers can make it to three hundred feet breathing mixed gases, but it takes years of training and is a logistical nightmare. The danger isn’t going down—although that certainly is dangerous—it’s coming back up. For a scuba diver, a one-hour descent to two hundred feet breathing regular compressed air would require a ten-hour ascent to purge the deadly levels of nitrogen gas in the blood that accumulate on the way down. A three-hundred-foot ascent on compressed air would most likely kill you.”

“WHILE NOBODY KNOWS EXACTLY HOW hammerheads, feroxes, and other sharks can navigate in permanently black, deep waters, most marine researchers believe that tiny bumps on the sharks’ heads and the sixth sense of magnetoreception have something to do with it. Called ampullae of Lorenzini, after the Italian anatomist who described them in 1678, these little bumps, which look like tiny freckles along the shark’s nose, are actually pores filled with electrically conductive jelly. At the bottom of each of the roughly fifteen hundred pores is a hair cell that resembles one of the tiny hairs inside a human ear. These cells, called cilia, can pick up the slightest change in electrical fields in the water.”

“Sharks’ electroreceptive senses are remarkably acute. Tests on captive great white sharks have shown that they can sense electrical fields as small as 125 millionths of a volt. Smooth dogfish sharks can detect 2 billionths of a volt, while newborn bonnethead sharks can detect fields less than 1 billionth of a volt.

To put this in perspective, imagine dropping a 1.5-volt battery in the Hudson River in Manhattan and then running a wire from that battery to Portland, Maine, some three hundred and fifty miles away. The dogfish and bonnethead sharks could detect the faint electrical field coming off the wire. This sense is five million times stronger than anything humans can feel. It’s by far the most acute sense yet discovered on the planet.”

“Dolphins and other cetaceans use these clicking sounds as part of a sophisticated form of sonar called echolocation. They’re similar to the clicks sperm whales used to shake Schnöller’s body years ago, only weaker.”

“A simple sonar system, consisting of one speaker and one hydrophone (an underwater microphone), works by first sending out a pulse sound, or ping. That ping travels through water until it hits something, then echoes back. The hydrophone records the echo, and a processor calculates how long it took for the echo of the ping to return. This system can provide information on how far away an object is and the direction it is moving, but nothing more.”

“Dolphins and some whales have the equivalent of thousands, even tens of thousands, of echo-collecting hydrophones built into their heads. When a cetacean sends out a click (its version of a sonar ping), it receives the echo information with a fatty sac located beneath the lower jaw, called a melon. Unlike ears, which provide only two directional sources to gather information, the melon provides the cetacean with thousands of data points. The animal can process these to gauge the distance, shape, depth, interior, and exterior of the objects and creatures around it.

“In 1958, during one of his first dolphin experiments, Lilly recorded a click-and-whistle conversation between dolphins and played it back at a slower rate. When he adjusted the frequency and speed of these dolphin sounds in water to match human speech in air, he found the ratio worked out to 4.5:1. This was a remarkable discovery. Sound travels 4.5 times faster in water than in air. The frequency of communication the dolphins were using, if modified to the density of water, Lilly wrote, matched the exact frequency of human speech in air. When he played the dolphin sounds at this slower speed, they sounded startlingly similar to human speech. Lilly concluded that dolphins were speaking a language similar to ours, but at a much faster speed, one far too rapid for us to comprehend

“Sperm whale clicks, which are used for echolocation and communication, can be heard several hundred miles away, and possibly around the globe. Sperm whales are the loudest animals on Earth.

At their maximum level of 236 decibels, these clicks are louder than two thousand pounds of TNT exploding two hundred feet away from you, and much louder than the space shuttle taking off from two hundred and fifty feet away. They’re so loud that they cannot be heard in air, only in water, which is dense enough to propagate such powerful noises. The noise level in air maxes out at 194 decibels.

Any louder, and sound becomes distorted to the point that it turns from a sound wave into a pressure wave. The threshold of noise in water is 240 decibels; any louder, and the noise will almost literally boil the liquid into vapor in a process called cavitation. Sperm whale clicks could not only blow out human eardrums from hundreds of feet away, but, some scientists estimate, vibrate a human body to death.”

Layoffs, Accountability & Leadership

What is the most important trait of a leader? While being a great leader requires a lot of qualities, the most important is accountability. I firmly believe that a leader should be the last to reap rewards in the good times and the first to sacrifice in a crisis; which is why I am disappointed with how the recent layoffs went down.

188,386. That’s how many people lost their jobs and had their lives severely impacted between 6/1/2022 and 1/20/2023. Regardless of size and industry, company after company announced their plan to shrink workforce. Even the best of them such as Google, Amazon or Microsoft had to take the drastic measure. The message is crystal clear: cut expenses now and gear up for a brutal environment that is expected to get worse in the coming months.

The current bleak outlook is mind-blowingly in contrast with what happened just a year ago. After the WHO declared Covid a global pandemic, folks expected an economic recession. Markets nosedived in March 2020. People were forced to stay at home. Businesses and personal life disrupted. But there was no recession. Instead, the once-in-a-lifetime pandemic pulled forward years of growth for companies and industries. Stocks repeatedly hit record highs. CEOs were optimistic about the future and thought that the favorable market conditions were here to stay. As a result, companies went on a hiring spree to accommodate the growth prospects.

Until the harsh reality set in. Over the past year, the war in Ukraine, the persistent supply chain issues, the change in consumer behavior, high inflation and rate hikes by the Fed created a volatile and hostile environment for businesses. Suddenly, everything didn’t look as rosy as expected. Growth was hard to come by. The stock market contracted. Companies were left with a bloating operating expense due to over-hiring and hyped optimism. To evolve, they needed to get leaner and more efficient. Hence, tens of thousands of good people lost their livelihood.

To be clear, I don’t blame CEOs for optimistically anticipating a growth run and hiring accordingly. As top executives, they must do what is right for stakeholders. If there were actually an opportunity to grow and they didn’t act to take advantage of it, they wouldn’t do their job properly. I give them the benefit of the doubt that they made the best decision with the information they had at the time. Business is always risky and this time, the dice just didn’t fall the right away for a lot of CEOs.

With that being said, I was a little bit disappointed when I read some of the memos that were shared publicly. I applauded CEOs that were candid enough to say that they were responsible for the decisions that led to the layoffs. Below are a few examples:

On 1/20/2023, Google announced that they were cutting 12,000 jobs:

I have some difficult news to share. We’ve decided to reduce our workforce by approximately 12,000 roles. We’ve already sent a separate email to employees in the US who are affected. In other countries, this process will take longer due to local laws and practices.

This will mean saying goodbye to some incredibly talented people we worked hard to hire and have loved working with. I’m deeply sorry for that. The fact that these changes will impact the lives of Googlers weighs heavily on me, and I take full responsibility for the decisions that led us here.

On 1/4/2023, Salesforce said in a filing that they were going to reduce about 8,000 jobs, or 10% of their workforce:

However, the environment remains challenging and our customers are taking a more measured approach to their purchasing decisions. With this in mind, we’ve made the very difficult decision to reduce our workforce by about 10 percent, mostly over the coming weeks.

I’ve been thinking a lot about how we came to this moment. As our revenue accelerated through the pandemic, we hired too many people leading into this economic downturn we’re now facing, and I take responsibility for that.

Last November, Facebook decided to shrink their workforce by letting go 11,000 employees

Today I’m sharing some of the most difficult changes we’ve made in Meta’s history. I’ve decided to reduce the size of our team by about 13% and let more than 11,000 of our talented employees go. We are also taking a number of additional steps to become a leaner and more efficient company by cutting discretionary spending and extending our hiring freeze through Q1.

I want to take accountability for these decisions and for how we got here. I know this is tough for everyone, and I’m especially sorry to those impacted.

In November 2022, DoorDash cut 1,250 jobs:

As with all things, I want to start and discuss the factors in our control that led to today’s announcement and take accountability for this decision. Prior to COVID-19, DoorDash was actually undersized as a company. The pandemic presented sudden and unprecedented opportunities to serve the evolving needs of merchants, consumers and Dashers. We sped up our hiring to catch up with our growth and started many new businesses in response to feedback from our audiences. 

Most of our investments are paying off, and while we’ve always been disciplined in how we have managed our business and operational metrics, we were not as rigorous as we should have been in managing our team growth. That’s on me. As a result, operating expenses grew quickly.

Stripe shrank its team by 14%

Today we’re announcing the hardest change we have had to make at Stripe to date. We’re reducing the size of our team by around 14% and saying goodbye to many talented Stripes in the process. If you are among those impacted, you will receive a notification email within the next 15 minutes. For those of you leaving: we’re very sorry to be taking this step and John and I are fully responsible for the decisions leading up to it.

It’s admirable for a leader to own up to their mistakes and admit that they were wrong. Not every leader does that. Nonetheless, in addition to the nice words, I was expecting a concrete course of action as a token of accountability and a show of togetherness. Yet, I haven’t read a single memo that mentioned a CEO’s pay cut or relinquishment of stock grants, let alone a resignation. It’s unlikely that a CEO forgoing a portion of stock grants or a year of salary will make as big an impact on a company’s financials as laying off hundreds of employees. But the sacrifice will signal to every employee that they have leaders that share their pain and sacrifice.

If that is not good enough as a reason, think about it this way: those employees that were dismissed were unlikely to have much influence on the decisions that led to the layoffs. They just did their job and followed orders. Yet, they were the first to go while the decision makers still stay. What message does that say about a company’s leadership? In the good times, Sundar Pichai, CEO of Alphabet, made $280 million in compensation in 2019, most of which came from stock awards. His base salary in 2022 dropped to $5 million. But at least he is still one of the most powerful CEOs in the world, doesn’t have to worry about making ends meet or immigration status. And his stock grants will vest again in a few years. I cannot say none of that about some of the folks that lost their jobs.

It’s not like what I argued above didn’t happen in reality. Two weeks ago, Tim Cook, CEO of Apple, requested and received a 40% pay cut. While Apple hasn’t announced any layoff yet, mainly because it is more disciplined in hiring than others, the company is not immune to the challenging environment. If they followed others in cutting jobs to please investors and chalk up their financials, nobody would blame them. Yet, the CEO voluntarily asked to have his salary reduced. That’s great leadership.

After the first two heavy losses of the season, Manchester United Manager Erik Ten Hag ordered his players to the training ground on what was supposed to be their day off. He made them run more than 13 miles as punishment for the lack of effort in said heavy defeats. What stunned everyone was that the 52-year-old boss participated in the run. He wanted the players to know that he was responsible for the disappointing results too. That act earned Ten Hag a lot of respect from his players. The team is currently in the top 4 and will likely qualify for Champions League next season. A prospect that few predicted a few months ago. The togetherness and leadership that Ten Hag showed set the foundation for the team’s current results.

We learn a lot about companies and people in good times. But we learn even more in the time of crisis. I definitely have learned a few things from the past 3 years, especially the recent months.

Weekly reading – 21st January 2023

What I wrote last week

Goldman Sachs Credit Card Portfolio – Apple Card

Business

SHORT-TERM vs LONG-TERM. Nick Sleep’s letters and insights are always valuable. Many companies claim to be all about long-term, but their actions scream the opposite. The list of characteristics by Nick (by no means are they complete) should help analysts see whether a company is about long-term growth or short-term wins. It is also a good checklist for executives whenever they want to evaluate their business.

Google Cloud Introduces Shelf Inventory AI Tool for Retailers. The premise of this technology sounds very interesting. Less human labor and more automation as well as data analytics. However, as the article indicates, it’s tricky to put this technology in practice. The first challenge is to perfect the algorithm. Given time, this should be feasible. The bigger challenge is cost. Imagine arming a Walmart Supercenter with cameras that can scan every aisle, level and product.

The Art and Science of Spending Money. As always, great writing and a lot of wisdom from Morgan Housel. This quote stood out from the rest for me: “Frugality, quite simply, is about choosing the things you love enough to spend extravagantly on—and then cutting costs mercilessly on the things you don’t love.”

Chick-fil-A franchise disclosure document. This may be a dry read, but this document shares the core details of Chick-fil-A’s standard franchise agreement. For instance, while the initial down payment is just $10,000, a franchisee will have to pay quite a lot of fees which can push the total investment to north of $2 million. Furthermore, readers can learn that Chick-fil-A earned almost $5.8 billion in revenue in 2021 and around $1.1 billion in profit. The net margin of 18% is much lower than the 32% that McDonald’s posted in 2021. That implies there is a significant difference between the two models.

Disney defended itself and Bob Iger against an activist investor Nelson Peltz. File it under a “business schools need to teach this” folder

Behind Disney’s Activist Investor Battle: A Marvel Mogul’s Revenge Play. A juicy article on the internal political struggle at Disney. As an investor, I am concerned about the turmoil at the top at Disney. Any company of the size and complexity of Disney must have steady and competent leadership to navigate treacherous macro-conditions and weather the fierce competition in the media industry. There has been anything but that at the iconic company since early 2020. Given that Bob Iger only has a two-year contract, this will not be solved any time soon.

Inside Elon Musk’s “extremely hardcore” Twitter. Musk has done tremendous damage to his reputation and image with the whole Twitter saga. And oh, it’s just merely started

Whole Foods charts a new course. There is nothing described in the article that convinces me Whole Foods will be in a stronger position 5 years from now. Enabling shoppers to return Zappos stuff in store? That’s just like Kohl’s. An apprenticeship to learn butchering? Yeah, that’s going to be tremendously popular. What about 3,000 local products in store? Well, it’s going to relate so much to shoppers who will have to pay a lot more just so they can feel more local.

Other stuff I find interesting

Mexico’s subway drivers depend on WhatsApp to keep the trains running. It’s both fascinating and horrifying that train workers in Mexico rely on their phones and particularly Whatsapp to keep the trains running

Lessons from the Streets of Tokyo. To copy the approach that Tokyo takes to build streets, a city in America needs to have a solid public infrastructure. Otherwise, narrow streets wouldn’t be able to handle thousands of people, especially in rush hour.

Kale, Brussels sprouts, cauliflower, and cabbage are all varieties of a single magical plant species. I did not know about this. Fascinating!

How Much Income Do You Need to Be Rich? “We all live our lives relative to our expectations. This is true in our relationships, in our careers, and in our finances. So, if we want to feel rich, we only have two options—earn more or expect less. The choice is yours. Because, ultimately, your income doesn’t determine how rich you are, your desires do.

Stats

Each frame of the CGI scenes in Avatar’s sequel took 47 hours to render

British people withdrew money 30.2 million times from ATMs in 2022. The average withdrawal amount was 105 pounds

Source: Cleanenergywire

What We Know About Goldman Sachs Credit Card Portfolio – Apple Card

Traditionally known as an investment bank, Goldman Sachs did not usually count consumers among its clientele. The effort to venture into consumer banking started with its proprietary platform called Marcus. Then, in August 2019, GS launched its first ever credit card, Apple Card, in collaboration with Apple. In 2021, the bank announced that it was going to acquire the General Motors credit card portfolio from Capital One. The acquisition was only completed in February 2022, but it had some effect on Goldman Sachs’ balance sheet a few quarters prior to the completion (more on this later). Along with the GM portfolio, GS also added a platform for home improvement consumer loan originations in GreenSky.

It’s interesting to study the performance of Goldman Sachs’ consumer banking arm for two reasons. First, it will help us understand more how difficult and expensive it is to build and sell consumer banking products from scratch. Second, it is also a proxy of how the Apple Card has been doing, given the notorious secrecy of the Palo-Alto-based tech giant.

Housekeeping facts

  • Between Q3 2019 and Q3 2021, we can be sure that all credit card balance on GS’ balance sheet came from Apple Card. I confirmed it to a member of the bank’s Investor Relations team (see below)
  • The GM portfolio and the acquisition of Green Sky were both closed in Q1 2022. It’s safe to say that the bank only included the additional loan balance on its books by then. Said another way, all credit card balance through Q4 2021 was from Apple Card
  • Between Q1 2021 and Q4 2021, the bank’s lending commitments included their estimate of the GM portfolio’s balance of $2 billion. The exact language is: “Credit card commitments also includes approximately $2.0 billion relating to the firm’s commitment to acquire a credit card portfolio in connection with its agreement, in January 2021, to form a co-branded credit card relationship with General Motors. This amount represents the portfolio’s outstanding credit card loan balance as of September 2021. However, the final amount will depend on the outstanding balance of credit card loans at the closing of the acquisition, which is expected to occur by the first quarter of 2022.” (Source: Goldman Sachs Q3 2021 10Q)
  • The GM portfolio’s estimated balance of $2 billion as of September 2021 was down from the $3 billion figure reported in August 2020
  • Between Q1 and Q3 2022, GS credit card lending commitments (another term of the amount of credit lines extended by the bank to credit card customers) included $15 billion in credit lines from the GM portfolio. From Goldman Sachs Q3 2022 filing: “Credit card lines issued by the firm to consumers of $60.66 billion as of September 2022 and $33.97 billion as of December 2021. These credit card lines are cancellable by the firm. The increase in credit card lending commitments from December 2021 to September 2022 reflected approximately $15.0 billion relating to the firm’s acquisition of the General Motors co-branded credit card portfolio in February 2022.”
  • Because lending commitments from the GM portfolio didn’t change over the last 9 months, even after the move closed, it’s quite safe to assume that credit card balance stays stagnant at $2 billion, give or take

Apple Card

Using the figures reported by Goldman Sachs and the facts mentioned above, I estimate that as of September 2022, the Apple Card portfolio had $12 billion in balance and $46 billion in credit lines. Those figures were significantly up from $3 billion in balance and $19 billion in commitments as of September 2020. That’s tremendous growth in just 24 months. At $12 billion in outstandings, Apple Card still trails behind the Amazon Prime Card, which is rumored to have $20 billions in comparison. But if Apple and Goldman Sachs can maintain this growth rate, that gap should be closed soon.

Apple Card Loan Balance & Commitments
Apple Card Loan Balance & Commitments

Apple and Goldman Sachs give me a $6,000 line on my Apple Card. Assuming that is the average credit line for every Apple Card holder, it would indicate that there are approximately 7.7 million customers in the portfolio ($46 billion divided by $6,000). The figure passed a sniff test to me when news outlets reported the GM book had 3 million customers and there were almost 500 million credit cards in the US. Furthermore, given the popularity of Apple devices in the US, where there are 330 million people in population, the Apple Card portfolio has a lot of room for growth in the future.

In addition, because credit cards are unsecured loans, I’ll be remiss if I don’t talk about delinquency rates of the Apple Card. In Q1 2022, when Goldman Sachs first reported past due loan amount, the 30+ day delinquency rate of the Apple Card was 3.5%. As the issuer tightened its credit policy, coupled with loan deferral programs as well as three rounds of stimulus checks, the delinquency rate dropped to as low as 1.63% before rising back up to 1.9% in Q4 2021. Compared to the 30+ day delinquency rate of Bank of America or Chase, Apple Card’s rate was about 70 or 100 basis points higher as of Q4 2021. While the risk exposure is not as good as it can or should be for GS, remember that the bank has relatively little experience in the credit card industry that has been around for 70-80 years.

Then, the GM portfolio came. The 30+ day delinquency rate of Goldman Sachs’ credit card business shot up to 2.3% in Q1, 2.73% in Q2 and 3.08% in Q3 2022. Keep in mind that this portfolio was previously managed by Capital One. Capital One is more willing to book consumers with FICO less than 670 than its peers. As a consequence, Capital One credit card books tend to have higher delinquency rates. Case in point, the 30+ day delinquency rate of its domestic card was 2.97% as of September 2022. While I don’t doubt that the introduction of GM increased Goldman Sachs’ risk exposure, the tough environment in 2022 might have also caused more Apple Card customers to miss payments.

As a result, I believe that the Apple Card portfolio has higher delinquency rates that what some other issuers reported, and the acquisition of a portfolio from Capital One apparently didn’t help.

New changes at Goldman Sachs

On 1/12/2023, Goldman Sachs announced that they made changes to their business segments and how they would report results to investors. Specifically, the bank will combine Consumer Banking, which includes its credit card division, and Transaction Banking to form what they call Platform Solutions. In the same filing to the SEC, Goldman Sachs disclosed pre-tax earnings/losses of the new segments in the last three years. The Platform Solutions segment lost almost $800 million in 2020, a tad over a billion in $2021 and over $1.2 billion in the first 9 months of 2022. Some news outlets and folks on Twitter were quick to attribute these losses to the Apple Card. So let’s take a look

Source: Goldman Sachs

While we can safely distribute much of the provision to the Apple Card, given the size of the portfolio, Operating Expenses made up most of the losses. This fact and the lack of detailed disclosures make it impossible to know whether the Apple Card really drove such expenses. Remember that Platform Solutions now includes the bank’s digital platform Marcus, Green Sky, the GM portfolio and Transaction Banking. Any of these can have an outsized impact on expenses, especially when the bank invested in infrastructure for future growth. Working at a bank that has retail banking and credit card products, I can tell you that normal consumers don’t know how complex and intensive it is to run and sell these products. Here are a few teams I remember on top of my mind:

  • Finance to control the purse
  • Compliance to make sure everything is legal
  • Credit Risk to help set the underwriting policy
  • Operations to make sure everything runs smoothly (and Operations is an umbrella term for several teams like Marketing Engineering, Credit Ops, Rewards, Embossing, Customer Care)
  • Customer Management to handle campaigns post-acquisition
  • Client Management to take care of projects and communication with our partners
  • Acquisition team to run campaigns to book customers
  • Data Analytics to help the business leverage data to make decisions
  • IT
  • Cybersecurity

It’s a giant endeavor to run a Consumer Banking arm. So it’s not really surprising to me that Goldman Sachs is racking up losses at the moment. What I am not convinced of is that the Apple Card is highly unprofitable. Because we don’t have the data to back that up. At least, not yet.

What goes into Operating Expenses
What goes into Operating Expenses. Source: Goldman Sachs

Weekly reading – 14th January 2023

What I wrote last week

Nike & Netflix partner

Business

The British are coming: Fleet Street’s ‘digital landgrab’ on US news sector. A fascinating piece on UK news outlets finding opportunity in the US. It’s all about finding more eyeballs and the huge ads market that the US has to offer. According to the article, UK newspapers either choose to be tabloidy or position themselves as a place where readers can get news neutrally. It’ll be interesting to watch the competition between the likes of TMZ and the tabloids from the UK pan out. In terms of being neutral news outlets, I have serious doubts over how one can stay neutral for a long time. Then, what’s the differentiation? What can British newspapers have to compete with the American incumbents?

The rise and fall of 15-minute delivery startups, an oral history. These 15-minute delivery startups never had a chance to succeed in my opinion. The unit economics is unfeasible. The cost of completing last-mile delivery is always high. So is the cost of subsidizing user activities or delivery drivers in the beginning. Throw competition, an unfavorable environment and low level of stickiness in the mix and you have a perfect recipe for a business that is destined to fail.

David Zaslav’s Rocky Ride as Hollywood’s Newest Czar. As CEO of a media giant like Warner Bros Discovery, David Zaslav is always going to get negative pieces like this one. And let’s face it: he may very well fail to overcome the current challenges. Investors put a premium on profitability AND growth. One is no longer enough. But to achieve both requires a lot of time, investments and execution; a luxury that the CEO doesn’t have because of the mountain of debt on the books. The combined entity is so big and complex that even to get two different organizations and cultures to gel is a monumental task. The changes that Zaslav made may not come to fruition, but being decisive is probably the only way any executive can succeed in this case.

OK, 2022 was a disaster for Tesla. What next?Now, some of you may have views about the sustainability of Tesla’s regulatory export credits, the value of their energy business, the prospects for an insurance business, the likelihood of reaching Level 4 or even Level 5 autonomous driving technology (and before anyone else does), or even the Teslabot. Some of these may be worth something, or all of them may be worth nothing. This certainly adds a wild card to the valuation of Tesla. But the main driver will probably remain the automotive business.”

How much Netflix can the world absorb? A long profile on Bela Bajaria, Netflix’s Global Head of Television. I wonder if this piece is supposed to support the executive in a time when the “be everything at everywhere” strategy at Netflix seems to run into trouble.

Other stuff I find interesting

Robberies at bank branches and ATMs in Denmark in 2022 dropped to zero due to the move to a cashless society.

India is learning to love electric vehicles — but they’re not cars. A quick look at EV vehicles in India. Similar to the US, India needs to overhaul the infrastructure, subsidizes EV purchases and needs to find a way to lower the manufacturing costs. The difference between the two countries? US favors electric cards while India is all about electric two-wheelers

Here’s how many EV chargers the US has – and how many it needs. The US currently has about 163,000 charging ports. To meet the demand of EV vehicles expected to be on the road by 2030, there must be A LOT more charging ports installed across the country.

Stats

Cash made up 59% of POS transactions and 42% of POS volume in EU in 2022

New York City welcomed more than 56 million visitors in 2022

The number of Mastodon active users dropped to 1.8 million in early January 2023, down from 2.5 million in early December 2022

Black founders raised just 1% of all VC funds in 2022

Dutch people are the most physically active in the world. They spend on average almost 13 hours a week exercising

Consumers spent $167 billion on mobile apps in 2022

Developers earned $60 billion from the App Store in 2022. Apple Fitness+ now has more than 3,500 workout and meditation sessions

Nike & Netflix Partner To Bring You “Netflix & Sweat”

A few weeks ago, Nike and Netflix announced a new partnership that saw the streamer bring onboard several Nike Training Club classes. Per Techcrunch:

The streaming service will release a total of 30 hours of exercise sessions in two separate batches. The programs, which include workouts for all fitness levels, will be available in multiple languages on all Netflix plans.

The first batch of fitness classes will launch on December 30, with the second batch releasing in 2023. A total of 45 episodes will be part of the first batch, which will include the following classes: Kickstart Fitness with the Basics, Two Weeks to a Stronger Core, Fall in Love with Vinyasa Yoga, HIIT & Strength with Tara, and Feel-Good Fitness. Once the classes are released, Netflix users will be able to search “Nike” to access them

Leverage what already exists

There are several things already in play that support the launch of this new fitness program. First, as a global household name, Netflix doesn’t need to spend a lot of money to advertise the brand and bring the new service to consumers. Everybody knows the iconic black & red logo. Second, with the existing infrastructure that enables streaming from millions of users, Netflix has more than enough experience and capacity to add the new fitness content to the mix. Their engineers will just need to append a few lines of code to their code base. Third, even though the concept of online fitness classes is not new, the pandemic, Peloton and Apple Fitness+ made it popular again. More and more people are receptive to the idea of working out at home and not having to drive to a gym, especially in unfriendly weather. Netflix’s fitness content fits right into that trend. Last but not least, to have a nice viewing experience at home, many Netflix subscribers invest in a great TV. Hence, all Netflix subscribers need to work out at home are motivation, some space and probably a mat.

A clever way to retain subscribers?

Streamers constantly need new content. Subscribers will churn if they don’t see new shows or movies that they like. To Netflix, it’s even more important to keep churn low than to other streamers. The likes of Warner Bros Discovery or Disney bring their movies to theater and generate millions, if not dozens of millions, of dollars in revenue before putting those IPs online. Despite launching ads, Netflix gets most of their revenue from subscription fees. As a result, they continuously crave for new content to keep subscribers staying and Netflix executives obviously hope that fitness classes are an inexpensive way to grow the library.

While the logic behind this collaboration between the two great brands is sound, I remain doubtful of the impact on Netflix’s churn and financials. Non-subscribers are unlikely to become members just for the fitness content. To those that already subscribe to the streamer, Nike Training Classes will not sway them one way or another. There are certainly a few on the fence that may stick around because they find more utility from Netflix, but that group should constitute only a small percentage of their subscriber base.

A weak proposition – A disconnect with the brand positioning

What makes Apple Fitness+ a success is that it fits right into Apple’s overarching brand positioning. Apple believes in leaving the world a better place than they found it. They do so by using hardware and software to make consumers’ personal lives better. And they happen to make a great fitness program paired with iPhone and Apple Watch. You see, it’s a compelling story that people can relate to.

It’s not the same with Netflix. When folks think of Netflix, they think of entertainment and binge-watching. Netflix and Chill is a real cultural thing. Fitness just doesn’t gel with that image. There is no obvious connection between the two concepts. And don’t take my word for it. Here is what Netflix said in the announcement:

It’s not always easy to motivate yourself to exercise, but the option to feel the burn and then directly transition into one of your favorite shows does have a certain appeal

The proposition is weak and unconvincing. Netflix isn’t selling the why. They are selling a feature and consumers are not appealed by features. Be honest, when you read that line from Netflix’s marketing team, are you inspired? The small number of classes indicates this is primarily a test from Netflix to gauge consumer interest. But even if the test yields positive results, the company needs to rethink its brand positioning. What is the why or the identity behind all the entertainment, games, fitness and other content? That question is not easy to answer and right now, it’s not answered.