Take-aways From Berkshire Hathaway 2020 Shareholder Letters

Shareholder letters, when written well, are a great source of knowledge, wisdom and interesting things. Berkshire Hathaway’s is one of those letters. Today, the company, which is based in Omaha where I currently reside, published its 2020 letter. I read it with a hot cup of coffee and pleasure, and now I want to share my take-aways in this post. You can read the letter in full here

You don’t always win every year, but being patient and having a long-term horizon matters

On the second page of the letter, readers can see the annual and compounded return of Berkshire Hathaway for the last 55 years. The firm didn’t always have a positive return every year. Far from it. It fluctuated greatly from one year to the next, from 28% return this year to -32% the following year. If these professional capital allocators who have more years of investing than my years of living don’t have a positive return every year, I think I shouldn’t set that bar for myself or neither should you. The main thing is that Berkshire had a compounded annual return of 20% in the last 55 years, meaning that the overall gain is some 2.8 million percent, a ridiculous return. Everyone prefers getting rich fast, but in the long term, it is likely better to be patient and have a long term horizon. The results will come, if you do it right.

Having an investing philosophy

Once in a while, I ran across some FinTwit folks who questioned the wisdom of holding large cap stocks such as Apple or Amazon. You know, the familiar big names across industries. These people claimed that to earn an outsized return, investors should look somewhere else where the fish isn’t fished as often. That may be true, but in the age of information, it’s really hard to get information that others can’t. What is harder to possess is patience and willingness to adopt a long term horizon. Back to Berkshire Hathaway, the company said that its Apple position was likely its 2nd most important asset. I mean, if these people upon whom thousands of investors entrust their savings choose Apple and earn excellent returns, why shouldn’t anyone, provided that they did their homework?

Berkshire’s investment in Apple vividly illustrates the power of repurchases. We began buying Apple stock late in 2016 and by early July 2018, owned slightly more than one billion Apple shares (split-adjusted). Saying that, I’m referencing the investment held in Berkshire’s general account and am excluding a very small and separately-managed holding of Apple shares that was subsequently sold. When we finished our purchases in mid-2018, Berkshire’s general account owned 5.2% of Apple.

Our cost for that stake was $36 billion. Since then, we have both enjoyed regular dividends, averaging about $775 million annually, and have also – in 2020 – pocketed an additional $11 billion by selling a small portion of our position.

Despite that sale – voila! – Berkshire now owns 5.4% of Apple. That increase was costless to us, coming about because Apple has continuously repurchased its shares, thereby substantially shrinking the number it now has outstanding.

To Charlie and Warren, I think they don’t care about being a contrarian like so many aspire to be. What they want to be is to be right with their allocation of capital, as it is their fiduciary duty to shareholders. If we can get excellent returns, will it matter if those returns come from a tech giant or a company few heard of? Nah. So if you are only comfortable with the companies you know, don’t listen to the “advisors” who seem to be more eager to be “contrarian” (whatever that means) than to be right.

On page 4 of the letter, Warren and Charlie laid out their investment philosophy. They prefer owning a piece of a great business to 100% of that business. Their reasoning is that great businesses are rarely available for the taking, and even if they are, they will be greatly expensive. Owning a piece of a great business is cheaper, more profitable and cheaper. Berkshire Hathaway’s favorite companies are good to great businesses with a competent leadership that retain most of their annual earnings. As the investees grow their businesses over time, Berkshire’s ownership becomes more valuable. Over a long period of time, the growth in value will be aided by the 8th wonder of the world, compound interest. It may sound easy, but it isn’t. Identifying great businesses to buy is a challenge in and of itself. Sitting on those investments patient for a long period of time is not an easy task either.

What’s out of sight, however, should not be out of mind: Those unrecorded retained earnings are usually building value – lots of value – for Berkshire. Investees use the withheld funds to expand their business, make acquisitions, pay off debt and, often, to repurchase their stock (an act that increases our share of their future earnings). As we pointed out in these pages last year, retained earnings have propelled American business throughout our country’s history. What worked for Carnegie and Rockefeller has, over the years, worked its magic for millions of shareholders as well.

Admittedly, I learned a lot from Charlie and Warren in terms of investing. I try to read up as much as possible about a business and if I like what I read, I buy the stock and try not to sell it. The decision not to sell isn’t driven by my financial determination that a stock has more upside to go. That piece, I still have to learn, even though I don’t find it easy. Instead, my choice to keep stocks over time is mainly driven by my laziness. I don’t want to get up every day and day trade. Plus, I believe that once I own a piece, a very small piece of a great business, it will be more beneficial to keep the ownership as long as possible. A lesson from the two wise old men.

Work ethic

Charlie is now 97 years old and Warren is 90 years old. They are still actively managing their firm, making investment decisions and interacting with shareholders, either through letters like this or a meeting. In the letter, they talked about the story of Nebraska Furniture Mart and its founder, Mrs B, which is one of my favorite business stories:

The company’s founder, Rose Blumkin (“Mrs. B”), arrived in Seattle in 1915 as a Russian emigrant, unable to read or speak English. She settled in Omaha several years later and by 1936 had saved $2,500 with which to start a furniture store. Competitors and suppliers ignored her, and for a time their judgment seemed correct: World War II stalled her business, and at yearend 1946, the company’s net worth had grown to only $72,264. Cash, both in the till and on deposit, totaled $50 (that’s not a typo).

One invaluable asset, however, went unrecorded in the 1946 figures: Louie Blumkin, Mrs. B’s only son, had rejoined the store after four years in the U.S. Army. Louie fought at Normandy’s Omaha Beach following the D-Day invasion, earned a Purple Heart for injuries sustained in the Battle of the Bulge, and finally sailed home in November 1945. Once Mrs. B and Louie were reunited, there was no stopping NFM. Driven by their dream, mother and son worked days, nights and weekends. The result was a retailing miracle.

By 1983, the pair had created a business worth $60 million. That year, on my birthday, Berkshire purchased 80% of NFM, again without an audit. I counted on Blumkin family members to run the business; the third and fourth generation do so today. Mrs. B, it should be noted, worked daily until she was 103 – a ridiculously premature retirement age as judged by Charlie and me.

Mrs B worked daily till she was 103. Charlie and Warren are in their 90s and still working. I mean, I find it inspiring. Sometimes, I feel old whenever I think about the time when I was 16, even though I am just approaching 31. But these great examples remind me that I still have a few decades to work and enjoy life. Such a reminder can be hugely valuable.

Weekly reading – 27th February 2021

What I wrote last week

I reviewed The Spotify Play

Business

Profile of Bumble CEO

Interview with Spotify CEO, Daniel Elk

Frozen food sales have been boosted by Covid-19

When Did Generic Grocery Brands Get So Good Looking?

CBS and Showtime have a combined 30 million subscribers. Paramount+ with ads will go live with ads at $5/month in March and $10/month without ads in June

AT&T and TPG: There is No Why

What I found interesting

A COVID-19 vaccine life cycle: from DNA to doses

A look into Zuck and Kaplan’s influence on content moderation policies

Massive experiment shows why ticket sellers hit you with last-second fees

Sheryl Sandberg and Top Facebook Execs Silenced an Enemy of Turkey to Prevent a Hit to the Company’s Business

Abandoned houses in Japan can be bought for cheap as a get-away destination, but upgrading them can be very expensive

How Uber Deals with Large iOS App Size

Stats you may find interesting

Electric vehicles in the US reached 1.8% market share in 2020

This one stat is more horrifying than interesting. US exceeded 500,000 lives lost due to Covid-19

40% of Disney+ subscriber base are in the US. Because India is responsible for another 30% of the streamer’s subscriber count, the other markets such as Latin America and Europe combined make up 30% of its subscribers

86% of iPhones introduced in the last 4 years are on iOS14

Book review: The Spotify Play: How Daniel Elk Beat Apple, Google & Amazon In The Race For Audio Dominance

As Spotify is one of the stocks in my portfolio, I have extra motivation to read this book. To get to know more about this company that is largely shrouded by secrecy. The book was written by a couple of Swedish interviews through many interviews and investigation of filings. It’s normal to read this kind of unofficial account of a company with a grain of salt or some skepticism, but it’s far from easy to write about a company when current or former employees are shackled by NDAs and when the founders or executives refuse to cooperate.

The book covered Spotify’s history from the very beginning to when it started to increase investments in podcasts. It started with Spotify’s founders, Daniel Elk and Martin Lorentzon, who each sold a startup and became a couple of millionaires, before they even worked together on a secret idea that would later become Spotify. Back when it just got off the ground, there was no playbook for a music streaming service like Spotify, well not legally. Hence, the young startup had to engineer both an app that was user-friendly and a business model that could yield profitability and work well with music labels. As Daniel Elk insisted on, for the right reason, having a free version of Spotify, which let users stream music for free, music labels in the beginning were highly skeptical and reluctant to cooperate. The prospect of Spotify generating enough ads money on the other side of the business to pay loyalties wasn’t appealing at best or practical at least. Through negotiations with the powerful music labels, Spotify came up with their Freemium model that still exists to this day.

“Eventually, Daniel had to compromise by adding a paid service. Three people at Spotify drove him to that shift in strategy: Spotify’s “dynamic duo”—Niklas Ivarsson and Petra Hansson—and the New York-based advisor Ken Parks. After scores of meetings with labels and legal consultants, they are said to have convinced Daniel that a paid version was the only way forward. The alternative would simply cost too much, in both cash and company shares, and never lead to a sustainable business. The freemium model that would define Spotify was thus born out of a tit-for-tat dialogue with the labels, with Niklas and Petra painstakingly hammering out the details of a new template. The industry hated the free service, but was prepared to put up with it as a means to an end, with Spotify vowing to convert free users to an ad-free, premium version.”

Excerpt From: Sven Carlsson. “The Spotify Play.”

In the first few years of its existence, Spotify came close to being belly up financially a couple of times. Back in the latter half of the 2000s, Spotify’s model was a new concept to investors. An investment in Spotify without an agreement with major music labels presented a significant risk. If Spotify had operated without official licenses, it would have embroiled itself and investors’ money in a mountain of legal trouble. Yet, just before the 2008 financial crisis hit, the company labored to put together a funding deal to keep the lights on.

At the Spotify office, around forty employees toasted to the news with glasses of sparkling wine. Daniel was visibly relieved, according to one account.

“That was lucky. If we hadn’t gotten funded, you guys wouldn’t have received your salaries,” he reportedly told his colleagues afterward.

In fact, the timing was immaculate. A few months later, the investment bank Lehman Brothers filed for bankruptcy, setting off the worst financial crisis in more than seventy years.

Excerpt From: Sven Carlsson. “The Spotify Play.”

A few years later, death came close again. This time, it was the ability to see shift in consumer behavior and to react fast that saved Spotify. After the iPhone was invented in 2007, a few years later, consumers started to consume music more on their little computers that could sit comfortable in their hands or pockets. Spotify at the time only had a desktop version. The company’s analytics team found out that their customers didn’t spend enough time on the desktop version on their mobile to be converted into paid users. If they hadn’t reacted and desktop use had kept plummeted, their revenue would have dropped. Without an expansion in paid users, Spotify would have had a hard time convincing potential investors for more cash. The trouble became compounded because having a mobile version required additional licenses from music labels. Somehow, the company pulled through what Daniel Elk called “switching out the engines mid-flight”

“At Jarla House in Stockholm, the analytics team had set up a wide range of dashboards visualizing the music service’s performance in real time. Starting in early 2012, Henrik and his team watched as the inflow of new users switched from desktop—where they could listen for free—to mobile, where Spotify only offered a free trial for forty-eight hours. That clearly wasn’t enough time to convert them into subscribers. Of the new users who tried Spotify on a smartphone, only a small percent would stay on and pay for the service. The conversion rate on desktop—the backbone of Spotify’s business—was much higher. But that was of little comfort if desktop use would keep dropping dramatically.”

“During the summer of 2012, music listening on Spotify plateaued as it usually did during the season. But when fall began, a growing number of users did not return. The analytics team suspected that a large number of them were now using their computers less often, opting for their phones instead. It was an early indication that the massive shift to mobile computing was beginning to pick up speed.”

“At this point, Spotify’s licensing team had spent more than six months negotiating deals for what they called a “mobile free tier.” It was not an easy task. While the record labels were making hundreds of millions of dollars every year in payouts from Spotify, they still disliked the idea of millions of people listening to music without ever being forced to pay. Now, Spotify wanted to expand their free service to include all smartphones, not just the ones belonging to paying subscribers.”

“The data became more and more distressing for Spotify. In the late summer of 2013, more listeners went “mobile only,” by now a common term. Smartphones now appeared to have become a real alternative to computers. Gustav Söderström would later describe this period as “the summer when Europe went mobile. Spotify’s number of active users—the lifeline that kept investors funding the company—was now shrinking. Internal estimates showed that Spotify’s user growth nearly halted between the second and third quarters of 2013.”

“A few years later, Daniel would admit that Spotify would have gone bust within six months if things hadn’t changed. To him, this was one of Spotify’s crowning achievements. Originally conceived as a desktop product, the company managed to adapt to the mobile era—and they did it “mid-flight,” under constant pressure from competitors and from the music industry, which at this time still swallowed around 80 percent of all of Spotify’s revenues.”

Excerpt From: Sven Carlsson. “The Spotify Play.”

The book also touched upon various topics such as challenging negotiations with the music labels, struggle to convince artists that Spotify’s interest was aligned with them, the fight against Apple, the effort to overcome operational chaos before IPO and the negotiations to acquire Soundcloud & Tidal that didn’t come through. Personally, I was interested in the book because I liked to study businesses and as mentioned, because I own Spotify stock. This isn’t an official account approved by the company. Consequently, I am not very sure how much of what was written is true. I don’t believe the authors were out to spread rumors, but on the other hand, I cannot have 100% confidence either. The writing is nothing spectacular. The beginning of Spotify was covered at length, but its more recent history didn’t receive as much attention. Furthermore, I don’t really think the title is correct. Yes, Spotify is a known brand, especially with young audience nowadays, but it’s a long way from being the dominant force in audio. Whoever will emerge victorious in the audio streaming war still remains to be seen. Hence, I would give it a 3/5, but would not put it under the “I highly recommend” category.

“The many problems varied. Spotify had grown quickly, and its organizational structure was, in places, haphazard. Its internal accounting system would have fit a medium-sized business operating in a handful of countries, but not a global market leader with business in nearly sixty countries. If a staffer in the finance department wanted to break down marketing costs for a single country for the year 2014, there would be no way of doing it.

Moreover, it was difficult for Spotify to accurately estimate its own costs. Over the coming years, the company would retroactively write up their royalty payments by more than $60 million due to accounting errors. Spotify had a hard time forecasting how the business would perform. During some quarters, subscriber growth came in well below its own estimates; during others, the number of subscribers surged past the growth team’s targets.”

“A number of sources interviewed for this book would describe how Daniel had a hard time knowing how to handle dustups among his lieutenants. Nearly a decade after Spotify started making big-name hires, many continued to recount how Daniel would let conflicts fester until the warring parties found their own solution. It was, still, a kind of natural selection in a corporate setting. The atmosphere is toxic at times. Daniel tends to give people overlapping responsibilities, then he lets them fight over who gets to do the work,” as one person would recall.

”No one is actually accountable for anything because virtually all decisions must take place though a bewildering process of group consensus, where people who are ignorant of the topic at hand somehow have just as much of a say as the experts,” one former employee at the New York office would post in November of 2019.”

Excerpt From: Sven Carlsson. “The Spotify Play.”

Deal with Sony

“Secret internal documents, which would not emerge until the publication of the Swedish edition of this book, reveal that Sony had negotiated an option—triggered four years down the line—to purchase what would amount to 2.5 percent of Spotify at a heavy discount. The label’s payoff came in the spring of 2015, when Sony paid just under $8 million for shares that, a few months later, would become worth twenty-five times more. Largely as a result of this deal, Sony would become the label with the largest Spotify holdings by the time the company went public in 2018.”

“For the right to stream Sony’s music catalogue in the US, Spotify agrees to pay a $25 million advance for the two-year duration of the contract: $9 million the first year, and $16 million the second. The advance is to be paid in installments every three months, and Spotify can only recoup this money if it meets or beats its revenue targets. The contract, however, does not stipulate how Sony Music can use the advance money. Some industry insiders claim that advance money is generally spent on things other than payouts to artists. Others wonder what happens to the “breakage,” or the part of the advance that is left with the label, when Spotify fails to reach its revenue goals. Is it attributed to streams and distributed to artists, or kept entirely by the label?”

“The contract also stipulates that Spotify give Sony free ad space worth $9 million over three years. Sony can use that space to promote its own artists or resell it at any price they want. Spotify also promises to make a further $15 million of ads available for purchase by Sony at a discounted rate. On top of this, Spotify must also offer Sony a portion of its unsold ad inventory for free, to allow the label to promote its artists.”

“The contract also states that Spotify’s smallest payout per stream will be 0.2 cents. But this measure can’t be used to calculate how much Spotify pays for the artists’ streams. It’s only used when it results in a larger payout than the label’s regular cut of Spotify’s total revenue. In essence, it’s a type of minimum guarantee. If too many users get stuck in the free tier, and Spotify’s average revenue per user falls below a certain level, Sony Music can ask to be paid per stream instead.”

Excerpt From: Sven Carlsson. “The Spotify Play.”

Weekly reading – 20th February 2020

What I wrote last week

I reviewed the book Working Backwards. If you are interested in the culture at Amazon, have a read!

Business

Robinhood revealed it has 13 million customers, 13% of which traded options, 9% of which were African Americans, 16% of which were Hispanic.

The highest court in UK ruled that Uber drivers have to be classified as employees. Uber cannot appeal further in the UK; as a result, unless it wishes to exit the UK market, especially London, operating expenses will likely increase from now on. Another interesting detail from the ruling is that workers should get paid whenever they are logged into Uber’s system and poised to accept rides. On the other hand, Uber argued that the ruling would only apply to Uber’s Mobility, not Uber’s Delivery. I don’t know if that’s factually true, but I don’t like their chances.

Facebook practically lied to marketers about their potential reach

Scott Belsky is one of my favorite follows on Twitter. As the founder of Behance and Chief Product Offier at Adobe, he had a fascinating take on several issues related to startups and products. Here is an interesting interview between him and Patrick O’Shaughnessy

US video streaming giants face tough second act in India

WSJ’s piece on Walt Disney CEO Bob Chapek. He seems to be more ruthless on the bottom line, less burdened by creativity and the nostalgia of the Disney brand than his predecessor

What I found interesting

Jacquard by Google. The product category may be interesting, but I am not sure that folks are ready for it. It’s bad enough that we carry around our phone with us every single waking moment in this digital life. Whether consumers agree to carry another device, no matter how small, remains to be seen, especially when the device comes from a company like Google, which is notorious for tracking users.

How to be more productive, more easily

Why did I leave Google or, why did I stay so long?

Have a look at the beauty of Vietnam, from above

Interesting stats that may interest you

35 of Amazon’s sellers in India made up more than two thirds of its online sales

Source: Chartr

Book Review: Working Backwards: Insights, Stories and Secrets From Inside Amazon

I always cherish a read that reports honestly on the culture of a company, pulling the curtain and providing details on what works, what processes the company used to forge the culture or the “tribe” that they have. Working Backwards is such a book. It was written by two insider Amazon veterans who lived the experience. From a small startup in Seattle that sold books online in the 1990s, Amazon has grown over time to become a household name in the world, a brand trusted by many and a competitor feared by rivals. It’s marching nicely towards generating $400+ billion in annual sales and currently employing over 1 million people. When a company consists of a small team of folks, management and the instillation of culture are straightforward. However, it’s another issue to manage more than 1 million people and still maintain the culture. How did Amazon do so?

“Our culture is four things: customer obsession instead of competitor obsession; willingness to think long term, with a longer investment horizon than most of our peers; eagerness to invent, which of course goes hand in hand with failure; and then, finally, taking professional pride in operational excellence.”

Excerpt From: Colin Bryar. “Working Backwards.”

When it comes to culture and corporate values, you may feel that a lot of companies just put together a list of sensible and sound-good sentences. That’s true. What makes one company different from another is how much the day-to-day operation is guided by its culture and how much the leaders exemplify it. From the very beginning, Jeff Bezos already showed the importance of customer obsession, setting the tone for the #1 value at Amazon for years to come. When employees see the CEO walk the walk, instead of just talking the talk, they believe in what he or she says and follows accordingly.

“From the tone of customer emails to the condition of the books and their packaging, Jeff had one simple rule: “It has to be perfect.” He’d remind his team that one bad customer experience would undo the goodwill of hundreds of perfect ones. When a coffee-table book arrived from the distributor with a scratch across the dust jacket, Jeff had customer service write to the customer to apologize and explain that, since coffee-table books are meant for display, a replacement copy was already on order, but shipment would be delayed—unless time was of the essence and they preferred the scratched copy right away. The customer loved the response, and decided to wait for the perfect copy while expressing their delight at receiving this surprise consideration.”

“Another of Jeff’s frequent exhortations to his small staff was that Amazon should always underpromise and overdeliver, to ensure that customer expectations were exceeded. One example of this principle was that the website clearly described standard shipping as U.S. Postal Service First-Class Mail. In actuality, all these shipments were sent by Priority Mail—a far more expensive option that guaranteed delivery within two to three business days anywhere in the United States. This was called out as a complimentary upgrade in the shipment-confirmation email. Thank-you emails for the upgrade included one that read, “You guys R going to make a billion dollars.” When Jeff saw it he roared with laughter, then printed a copy to take back to his office.”

Excerpt From: Colin Bryar. “Working Backwards.”

One of Amazon’s core values is Hire and Develop The Best. In the very beginning, staff was handpicked by Jeff Bezos, who has a notoriously high standard. As the hiring need grew substantially, Jeff couldn’t get involved in every hire any more. At one point, they ” had new people hiring new people hiring new people.” It became much more challenging to ensure the quality of every hire. Hence, The Bar Raiser program was created. The program’s purpose is to create a formal, scalable and repeatable process that can help with hiring the right people. Essentially, in addition to the normal practices such as having detailed Job Descriptions, phone screening and multi-team interviews, Amazon trains a team of interviewers whose goal is to identify in every new hire something that he or she can do better than a member of the existing team. The Bar Raiser cannot be the hiring manager or recruiter, but has the veto power to ultimately reject an applicant; though such a power is reportedly rarely exercised. It’s similar to having a new set of eyes that can review your work, whether it’s an essay or a code, and help remove the gut feelings out of the process as much as possible.

As Amazon’s business became increasingly multi-faceted and complex, how did the firm organize teams internally to be nimble, effective and innovative? The answers are: single-threaded leadership and two-pizza teams. The concept of single-threaded leadership is fairly simple: appoint someone to own a major initiative and remove all other responsibilities. Unburdened by other responsibilities, these single threaded leaders can devote all the time and energy to make their initiatives work and grow. More importantly, when a company wants to come up with new ideas, there is no way to gauge the results of the ideas without bringing them to real life and there is no point of doing so when there is nobody focused completely on that task alone. Andy Sassy, who will become the next CEO of Amazon in Q3 2021, used to be Jeff Bezos’ shadow and the single threaded leader for AWS. Other major successes at Amazon such as Prime, Kindle and Amazon Digital all resulted from having dedicated teams and leaders build them up from the ground.

“Amazon’s SVP of Devices, Dave Limp, summed up nicely what might happen next: “The best way to fail at inventing something is by making it somebody’s part-time job.”

And there is the two-pizza team. It’s normal in a working environment to depend on somebody else for your job. However, if there are too many dependencies, they will slow down the innovation process and reduce the efficiency of the whole company. To address that issue, Amazon came up with the two-pizza team concept. The idea is to have a small enough team that they can be fed with two pizzas. Each team is tasked with removing its dependencies and building out infrastructure and innovating. The sooner a team becomes unshackled by dependency on others, the sooner it can dedicate its resources to actual work and innovation. Each team functions like a small startup or a self-sustaining API that can work together if necessary, but doesn’t rely on others to be effective.

The next element of the Amazon Magic is my favorite: the importance of writing. At Amazon, Power Point is replaced by 6-page memos. The point is that writing a memo helps crystalize and sharpen ideas, as well as removes the limitations of a Power Point. Of course, Amazon still delivers presentations to partners, but internally, they rely on memos to ensure that the presenters think through the ideas/problems and don’t waste anybody’s time with half-baked thoughts. Another practice is to write a PR/FAQ for every new product/service idea. The idea is to envision the end result or customer experience that could come from a new idea, put it down to a one-page press release and work backwards to the details in an FAQ section.

I cannot tell you how many times I came up with an idea and after putting it to words on this blog, I realized how little I thought about it. Every time I write about something on this blog, it still may not be accurate, but the end product is much better than my original thought. At work, I also see it first hand. People have a lot of ideas in their head and shoot out ideas to everyone else. I am pretty confident that they didn’t take the time to work through the nuts and bolts, the logic, the challenges and ramifications of their ideas.

“The reason writing a good 4 page memo is harder than “writing” a 20 page powerpoint is because the narrative structure of a good memo forces better thought and better understanding of what’s more important than what, and how things are related. Powerpoint-style presentations somehow give permission to gloss over ideas, flatten out any sense of relative importance, and ignore the interconnectedness of ideas”

“Pressed against this functional ceiling, yet needing to convey the depth and breadth of their team’s underlying work, a presenter—having spent considerable time pruning away content until it fits the PP format—fills it back in, verbally. As a result, the public speaking skills of the presenter, and the graphics arts expertise behind their slide deck, have an undue—and highly variable—effect on how well their ideas are understood. No matter how much work a team invests in developing a proposal or business analysis, its ultimate success can therefore hinge upon factors irrelevant to the issue at hand.

We’ve all seen presenters interrupted and questioned mid-presentation, then struggle to regain their balance by saying things like, “We’ll address that in a few slides.” The flow becomes turbulent, the audience frustrated, the presenter flustered. We all want to deep dive on important points but have to wait through the whole presentation before being satisfied that our questions won’t be answered somewhere later on. In virtually every PP presentation, we have to take handwritten notes throughout in order to record the verbal give-and-take that actually supplies the bulk of the information we need.

“Pressed against this functional ceiling, yet needing to convey the depth and breadth of their team’s underlying work, a presenter—having spent considerable time pruning away content until it fits the PP format—fills it back in, verbally. As a result, the public speaking skills of the presenter, and the graphics arts expertise behind their slide deck, have an undue—and highly variable—effect on how well their ideas are understood. No matter how much work a team invests in developing a proposal or business analysis, its ultimate success can therefore hinge upon factors irrelevant to the issue at hand.

We’ve all seen presenters interrupted and questioned mid-presentation, then struggle to regain their balance by saying things like, “We’ll address that in a few slides.” The flow becomes turbulent, the audience frustrated, the presenter flustered. We all want to deep dive on important points but have to wait through the whole presentation before being satisfied that our questions won’t be answered somewhere later on. In virtually every PP presentation, we have to take handwritten notes throughout in order to record the verbal give-and-take that actually supplies the bulk of the information we need. “The slide deck alone is usually insufficient to convey or serve as a record of the complete argument at hand.”

There are more great points, examples and details about Amazon’s culture from the book, apart from some of my favorite above. The book also touches on the value of thinking long term, being patient, removing defections at every level or controlling the input variables. With what I think are sensible decisions and policies, there is little wonder why Amazon is a success that it is today. In my opinion, there is no greater competitive advantage than having a robust culture that can foster a company’s mission and vision. You can replicate parts of operations or strategy, but it’s much harder to replicate a culture. Amazon managed to put together a strong culture, evidenced by their financial success and brand name, and it’s something that rivals will find highly challenging, if not impossible, to mirror.

This is a great read for business students or any curious mind that wants to know more about one of the greatest companies on Earth. If you are looking for such a read, I highly recommend it.

Disclosure: I own a position on Amazon.

Weekly reading – 13th February 2021

What I wrote last week

I reviewed Exercised: Why Something We Never Evolved To Do Is Healthy And Rewarding, a book that talks about how important exercise is from a Human Evolution and Anthropology perspective

The importance of owning a relationship with your customers

I talked about Uber as a business and its acquisition of Drizly

Business

An interesting piece on the CEO of Adobe and his relationship with fellow CEOs

An interview with the richest man in Japan

A very interesting piece on the threat that Canva and Fima pose to Adobe

An interesting post on the culture of writing memos at Amazon

Bloomberg has a piece on how Tim Cook built his own version of Apple. Tim Cook’s version isn’t bad at all as the company is now worth $2.3 trillion

How Facebook is doubling down on Marketplace

What I found interesting

A story on Yuta Watanabe, a Japanese basketball player who is having a season in the NBA

According to a new study, Apple Watch can help identify Covid-19 symptoms

Interesting stats

Contactless payments are expected to grow by 6-8% after Covid

40% of consumers in the US that used a “Buy Now, Pay Later” service missed at least one payment

The App Store saw more than $10 billion in consumer spending in 2020

Apple Watch is reportedly worn on 100 million wrists

A look at Uber after it acquired Postmates and Drizly

Compared to 2 or 3 years ago, Uber is a much more focused company nowadays. Instead of stretching itself thin across the globe, losing money significantly in many markets and fighting legal battles everywhere, Uber is now present in only markets where it’s among the market leaders. In addition to selling its operations in a few markets like South East Asia, China and Russia to local rivals, Uber purposefully exited other markets that it deemed not worth fighting for. Plus, it sold operations that might have future potential, but was bleeding cash such as autonomous vehicles. I mean, innovation can be sexy and as a tech company, Uber may be tempted to pursue that, but because it hasn’t made profit as a company, it’s understandable that Uber tries to focus on what matters: Mobility, Delivery and the markets where it is confident it can generate meaningful revenue and profit.

Uber's Mobility Footprint
Figure 1 – Uber’s Mobility Footprint. Source: Uber
Uber's Delivery footprint
Figure 2 – Uber’s Delivery Footprint. Source: Uber

Mobility used to be a much bigger business than Delivery, but Covid-19 turned things upside down. Delivery has grown substantially in the past year and been the savior of a business whose major cash cow was badly damaged by the pandemic. Delivery’s gross bookings in Q4 2020 exceeded $10 billion, compared to $6.8 billion in gross bookings for Mobility. If we look at the rolling 4-quarter average gross bookings, Delivery surpassed Mobility in Q4 2020, but of course, it’s likely that once we get back to normal, Mobility will regain its crown. Deliver has seen its take-rate grow steadily since Q4 2018 to reach 13.7% in Q4 2020 and is now not so far off the long-term target of 15%. Furthermore, while Mobility has been profitable, Delivery hasn’t. The good news for Uber is that it is achieving increasingly positive operating leverage in Delivery. While its Delivery net revenue has grown fast, its adjusted EBITDA has also gone in the right direction. If Uber can make true of its plan to be adjusted EBITDA positive in 2021, it likely means that we’ll see a profitable Delivery in 2021 as well; which already happened in 15 markets.

Uber's Delivery has been on fire
Figure 3 – Delivery has been on fire in 2020
Uber's take-rate
Figure 4 – Deliver take-rate has been on the rise and is not far off the long -term target
Uber's EBITDA
Figure 5 – Delivery EBITDA is getting better and better
Uber's long term goals
Figure 6 – Uber saw profitability for Delivery in 15 markets and an improved economics in others

Uber’s main four stakeholders are end users, partners (whether they are mom-pop restaurants, well-known chains or grocery stores), drivers/deliver people and lawmakers. Lawmakers have an influential role in Uber’s future as the laws they make can have major impact on Uber’s top and bottom line. But for this section, let’s just talk about the other three.

The way I think about Uber as a business is that it connects end users, partners and drivers altogether. The more end users Uber can present to its partners, the more partners it is likely going to sign. In turn, that means Uber’s end users can have a bigger selection at their finger tips, raising Uber’s value proposition. On the other hand, a bigger end-user pool helps the company sign up drivers. Drivers have limited resources in their vehicles and time, as even the most dedicated drivers can’t drive for more than 24 hours a day. Nobody wants to drive around needlessly all day without getting paid while having to pay for vehicle expenses and gas. As a result, the more business opportunity Uber can bring to drivers, helping them better leverage their time and resources, the more drivers will sign up. When it comes to making more trips and money, do drivers care if it’s a parcel or a person that needs transporting? In return, more drivers lead to faster “delivery” (transportation of an object from one place to another), whether it’s the delivery of a person or an item. Faster delivery means that customers will be happy and stick around using Uber more. In short, it’s an intricate multi-party relationship that Uber has to manage. It’s not easy or cheap to begin with, but once Uber sets these flywheels into motion, they can gain lasting competitive advantages. For example, at the end of Q4 2020, Uber recorded 675,000 active merchants, up from 450,000 in Jan 2020. It’s unclear whether this 675,000 figure includes the 100,000 partnered merchants that Uber inherits from its acquisition of Postmates. Meanwhile, Grocery Gross Booking exceeded $1.5 billion annualized run-rate. These numbers indicate a growing ecosystem.

My understanding of Uber flywheel
Figure 7 – My attempt at creating flywheels for Uber

So how does Uber make money? In short, from all three stakeholders: customers, partners and drivers. Here is what Uber said in its latest SEC filing back in Q3 2020:

Mobility Revenue

We derive revenue primarily from fees paid by Mobility Drivers for the use of our platform(s) and related service to facilitate and complete Mobility services and, in certain markets, revenue from fees paid by end-users for connection services obtained via the platform. Mobility revenue also includes immaterial revenue streams such as our Uber for Business (“U4B”), financial partnerships products and Vehicle Solutions. Vehicle Solutions revenue is accounted for as an operating lease as defined under ASC 842.

Delivery Revenue

We derive revenue for Delivery from Merchants’ and Delivery People’s use of the Delivery platform and related service to facilitate and complete Delivery transactions. Additionally, in certain markets where we are responsible for delivery services, delivery fees charged to end-users are also included in revenue, while payments to Delivery People in exchange for delivery services are recognized in cost of revenue.

Source: Uber

On the Mobility side, Uber takes a cut from bookings (around 20-25%) paid by customers before transferring the rest to drivers. On the Delivery side, it makes money from everybody involved in an order. After paying a one-time set-up fee of $350, restaurants have to pay Uber 15% or 30% commission on every order, depending on what delivery method they choose. If they user Uber for the delivery, the commission rate is 30%. If restaurants use other delivery methods, it falls to 15%. With regard to drivers, drivers receive a fixed fee for picking up and dropping off items and a variable rate based on the distance they cover. From the end-user perspectives, there are more than one fee involved in every order. According to Uber:

– Delivery Fee: Delivery fees vary for each restaurant based on your location and availability of nearby delivery people. You’ll always know the delivery fee before selecting a restaurant.

-Service Fee: Service fees equal 15% of your order’s subtotal, subject to a minimum of $2. The fee does not apply to restaurants that deliver their own orders.

– Small order fee: Small order fees apply when an order’s subtotal is less than a certain amount. This varies by city, but is either $2 for subtotals less than $10 or $3 for subtotals less than $15. You can remove the fee by adding more items.

– Delivery adjustment fee: A delivery adjustment fee refers to an update you made after placing your order- like changing your address. It helps to pay your delivery person for extra time and effort.

Source: Uber

In short, if there is no delivery adjustment and orders are above the small order threshold, Uber typically can take at least 15% of the order from merchants and delivery fees from end users which Uber doesn’t share with drivers. If merchants don’t have in-house delivery workforce, Uber can earn more from both ends of the transaction with 30% coming from the merchants and service & delivery fees coming from end users. Mom-and-Pop merchants whose limited resources don’t allow them to retain on the books a delivery team represent a more lucrative segment to Uber. During the pandemic when delivery is a trend, these merchants may not have a choice, but to partner with the likes of Uber. The question is: what will happen when seated dining resumes? How will that affect Uber’s Delivery business?

In Q4 2020, Uber closed the acquisition of Postmates. Similar to Uber, Postmates charges merchants at least 15% on every order and its fee structure imposed on end users is, in principles, similar to Uber’s. What Postmates offers to Uber is less competition, access to Postmates’ footprint and the deliver-as-a-service capability. Instead of building the infrastructure and signing merchants from scratch, Uber can quickly snap up what Postmates has and build from there.

With Postmates, we bolstered our local commerce capability through their delivery-as-a-service offering that already counts Walmart, Apple and 7-Eleven as customers. In December, delivery-as-a-service, represented 18% of Postmates orders, and we intend to scale this out further along with our Uber Direct product.

Source: Uber’s Q4 2020 Earnings Call – From Koyfin
Uber Direct
Figure 8 – Uber’s Delivery-as-a-Service Portfolio. Source: Uber

In Feb 2021, Uber announced its acquisition of Drizly for $1.1 billion in stock and cash. I think it’s a smart acquisition on Uber’s part. Let’s look at it together. Drizly was founded in 2012 when their founders realized the complexity of alcohol distribution in the US could present a golden business opportunity. Liquor distribution in the US mainly follows the three tier system and can be pretty fragmented and complex. In short, liquor producers or importers can only sell to wholesale distributors which, in turn, can only sell to retailers who, with a liquor license, can sell to end users. There are exceptions across the states and can vary even from county to county. Added to the complexity are the restrictions on alcohol delivery. Some states allow delivery of liquor, beer and wine. Others restrict delivery to only beer and/or wine while a few prohibit delivery of alcohol altogether.

Alcohol delivery restrictions across the states
Source: Consumer Choice Center

How does Drizly make money? Drizly works with local retailers that wish to sell alcohol to consumers and charges these retailers a fixed monthly fee for the privilege. In return, retailers receive two things: marketing and an age-verification technology. Local retailers, especially smaller ones, don’t have the coins to spend on marketing nor do they have the ability to verify the legal age of buyers during the transaction. Hence, these retailers could face a huge legal liability if things went wrong and they were caught selling alcohol to whomever they shouldn’t have. Drizly offers retailers its proprietary technology to verify IDs to ensure buyers are who they said they are. Furthermore, Drizly charges consumers roughly $7 on each transaction, including a Delivery Fee of around $5 and $1.99 Service Fee. It’s important to note that retailers are responsible for the delivery task. What it means is that Drizly never takes possession of the alcohol during the transactions and therefore, doesn’t have to get a permit. By avoiding the expensive delivery business, Drizly can focus on what it does best: navigating the complex legalities, connecting merchants and consumers and marketing. On the merchant side, they are free to set up their own prices on Drizly marketplace and do not have to relinquish a cut of the sales to the company. The more alcohol Drizly can help them sell, the cheaper that monthly fixed fee becomes and the more likely retailers can negotiate a better term with distributors.

First of all, by acquiring Drizly, Uber gains access to a profitable and growing business. According to Uber, Drizly is growing at 300% YoY and already profitable on an EBITDA basis. I suspect that once we get out of this pandemic, consumers will be more aware of the prospect of alcohol delivery. Hence, Drizly will likely continue to see growth in the future, albeit perhaps not on the level that it saw in 2020. Furthermore, Drizly is a boon to Uber’s target of becoming profitable in 2021. Not only is the acquired profitable itself, but Drizly’s monthly revenue from retailers presents a much higher gross margin than Uber’s main businesses.

Second, Uber acquires a team that knows how to navigate the legal challenges in the alcohol market and an ID verification technology. Uber is well-versed in dealing with local authorities itself, but transportation is a different beast from alcohol delivery. With Drizly, Uber won’t have to start from scratch and will be able to stimulate Drizly’s growth with its much more sizable pocket.

Third, snapping up a market leader like Drizly prevents it from falling into the hands of Uber’s competitors. It’s a pre-emptive strike. Once the integration of Drizly into Uber’s platform is completed, Uber users can order the transportation of themselves (Mobility), food, groceries, parcels and alcohol all under one app. Uber’s competitors can match its offerings to some extent, but none can offer the same breadth of services like Uber, now that it adds alcohol delivery to the mix. To be able to do what Drizly does is not an easy feat, but to Uber, it’s adding to their competitive advantages.

Fourth, Uber has an advertising business that Deutsche Bank estimates to earn $1 billion in 2024. With the integration of Drizly, Uber adds to the potential clientele of advertisers and more data generated by Drizly’s marketplace.

In short, this is a great marriage between Drizly and Uber. Uber offers the smaller app its experience in building a marketplace, more financial resources, a much bigger brand name and especially marketing reach which is important to Drizly’s merchants. On the other hand, Drizly gives Uber a growing & profitable business, as well as access to a highly regulated business that is challenging to replicate.

Uber’s ambition to become a Super App has been obvious for a while. What should be encouraging news to investors is that it restructures itself to be more focused, exiting cash-bleeding businesses and unprofitable markets, and is willing to invest in its vision with the acquisition of Postmates & Drizly serving as proof. Of course, nobody can say with 100% certainty that these acquisitions will work out in the future, but in theory, I personally think that they make sense and are important pieces of a growing jigsaw.

Disclosure: I have a position on Uber.

Owning the relationship with your customers. A look at the controversial case of Apple

Humans form relationships with one another. Between two people, a relationship is only strong when each side benefits from it and strives to strengthen the bond over time. If a friend betrays you or harms you, there likely won’t be a friendship any more, right? Once a relationship is formed, the stronger it is, the less it is less effected by others and the more trust there is. If a romantic relationship between you and your boyfriend/girlfriend is strong, you are less likely to be swayed by the opinion of your friends or family. And the people with whom you have the best relationship are the folks you trust the most.

Why do I need to state such an obvious observation? Because it is the same deal between companies and customers.

Relationship between companies and customers

When there is a transaction between a customer and a company, the two parties form a relationship. However and whether the relationship lasts depends on many factors: Is the customer happy? Is the company happy? Are there efforts involved to strengthen the relationship over time? Is there trust? A company like Amazon gains the trust of its customers through Prime & an increasing host of benefits, a variety of choices, quick delivery, easy return and consistency. From Amazon perspective, they have been investing a lot of time, effort and money into cultivating the relationship with its customers. In return, customers like and trust them. Millions of people shop at Amazon. Many, by default, head to the site to look for products. Such a relationship is so strong that it’s not much affected by 3rd parties or suppliers that depend on Amazon. They don’t form much of a bond with customers or the bond isn’t as strong as Amazon’s. The same goes with governments. Consumers, especially in America, don’t usually have the greatest of relationships with governments. Hence, it’s not a high bar to cross for Amazon in this regard. Additionally, because there is trust and a great relationship, Amazon customers stay loyal and locked in (intentionally or unintentionally through Prime), saving the company some trouble from competitors in the retail industry.

I picked Amazon because it’s a household name and an easy example. But the logic applies to every company. I drew a little diagram below. Inside the blue bubble that stands for a relationship, two parties work to build it over time. Outside the bubble, there are factors that can influence it. The stronger the relationship/bubble, the smaller the potential influence. Companies lose competitive advantages because the relationship isn’t as strong any more. Kodak didn’t offer consumers the benefits that digital cameras did; therefore, their relationship was strayed, paving the way for their demise. Nokia had nothing but inferior products and customer experience to offer. That’s why they lost the relationship to other phone manufacturers like Apple or Samsung. Barnes and Nobles lost the relationship to Amazon in the same way.

Imagine that your best friend or spouse is an executive at a company with an opening and an acquaintance reached out to your for help with an introduction. Under normal circumstances like (99% of the time!), however you make the introduction or whether you choose to make it at all is up to you. That is because within the relationship between you and the executive, the two parties determine the rules and whoever wants to leverage it has to respect and follow them. Think about it this way. Advertisers who want to reach Facebook users have to comply with Facebook guidelines. Apps that want to reach Apple users have to comply with Apple. Brands that want to sell to Walmart’s customers in Walmart’s stores, you guess it, have to comply with Walmart. The farther away from customers and the weaker a relationship, the less say a company has on its fate and the more it has to rely on others.

Which brings me to Apple. I want to talk about it using the relationship logic above because the debate is interesting and offer a lot of nuances.

Apple vs Facebook

Facebook’s main business is to sell ads. To be able to help advertisers sell personalized ads, Facebook needs to track users. In the past, Apple allowed Facebook as well as other apps to track users through Identifier for Advertisers (IDFA), which is unique for every device even though users’ identity isn’t disclosed. A few months ago, Apple announced its plan to stop the practice with the launch of iOS14. Specifically, advertisers now have to ask users’ permission to continue to track them across different apps and users have the choice to grant or decline that request. Facebook attacked Apple for being a monopolist and anti-competitive practices. Some said that Apple’s action was self-serving and hypocritical because it is building its own ads machine and it’s likely that Apple’s own ads engine isn’t subject to Apple’s rules as others. Apple critics piled on the criticisms by saying that Apple wields too much power and impedes the growth of the future Internet. Let’s unpack then by looking at the relationship between consumers, Apple, Facebook and other parties.

Facebook has a relationship with its users through its portfolio apps such as the Blue App, Whatsapp, Messenger or Instagram. Advertisers that want to reach the users on those platforms have to adhere to Facebook’s rules and guidelines because they are leveraging a relationship that is not theirs. Obviously, I don’t imagine Facebook would be happy if advertisers wanted to dictate how the relationship should be. After all, they own the closest relationship with their users.

Unfortunately for Facebook, in the case of Facebook users on iOS platforms, they aren’t necessarily the one that owns the closest relationship. Apple does. Hence, using the same logic laid out above, Facebook has to adhere to Apple’s rules and guidelines, in the same way that advertisers have to listen to Facebook. When Apple changed the rules to make cross-app tracking more challenging because they want to bolster their own relationship with their consumers, who is Facebook to say what Apple should or should not do? Would they be happy if advertisers wanted to dictate ads rates with them on their ads platforms?

The same goes with app developers who want to reach out to millions of iOS users. If Apple doesn’t want to have certain apps on their App Store (Overtly sexual or pornographic material/ Realistic portrayals of people or animals being killed, maimed, tortured, or abused, or content that encourages violence / Depictions that encourage illegal or reckless use of weapons and dangerous objects) or if they want to remove Parler in the aftermath of the insurrection on the 6th of Jan 2021 because that’s how they want the relationship to be (for good reasons), they should be within their rights to do so. If they want to charge commission on certain apps to be in the App Store, that’s their rights as well.

Companies love to lock in customers with exclusive service or products that grant them exclusive rights. That makes sense. If you spend money and resources to cultivate that relationship, you should reap your rewards. The same should for Apple. It spends money and resources on building and maintaining not only the App Store, but also hardware and software, why should it not be able to dictate their own relationship with iOS users?

But Apple wields too much power!

Indeed they do. There are currently more than 1.5 billion Apple devices in circulation, 1 billion of which are iPhones. In the US, about 60% of mobile devices are iPhones. That’s extraordinary power that one company possesses. It’s a legitimate concern that a company should not have that much power, especially given the tight grip that the company has on its proprietary hardware and software. However, it’s worth noting that Apple is in this position today because of their own efforts and the lack of competition. Which of its competitors can offer the same integration of services, hardware and software? Amazon is legendary in devotion to customer services, but they aren’t great at mobile production or software. Google owns Android, but they haven’t been great at hardware or customer services. Samsung manufactures phones, but they do not own Android. Hence, it’s not entirely fair to blame it all on Apple. If there is no challenger that can offer the same benefits to drive the end users from the relationship with Apple, it’s hardly 100% Apple’s fault that it happens, is it?

But Apple impedes innovation!

When we look at the fact that there are 1.5 billion Apple devices in circulation, the company can be bottleneck that impedes innovation. I am no app developer, but I can imagine the scenario that developers complain the tools Apple forces them to use aren’t advanced enough to let them do what they want. If that’s the case in reality, it’s a legitimate concern. But if Android were that much better at fostering innovation, why are we still in this situation, given that Android has a bigger market share than iOS globally? Why do we debate on the power of Apple, and not of Samsung or other phone manufacturers? As I imagine, if the operating system were so innovative that users would have no choice but to flock to Android devices, Apple wouldn’t have the power that they have today. In essence, while this can be a legit concern, there isn’t much proof of that.

Imagine that you are in a relationship and someone comes and tells you: well you know, the person you are dating with is what stops you from even better days and more happiness in the future. I mean, that can happen, but you kinda need some proof.

But their privacy policies are self-serving!

Which companies don’t act in their own interest? Even when companies try to uphold their corporate social responsibilities, they try to align them with their P&L and finance. If an environmentally-friendly initiative could make Apple look better, but present a $20 billion hit to their bottom line, I don’t think you would see them take it up. In this case, does it matter whether Apple implements the new privacy policy out of concern for their users or as groundwork for their ads business? Yes, it’s hypocritical if Apple wants to grow their ads business and claims the new policy is for the end users, but doesn’t every company do so? If Apple admitted to doing it for their ads business, would critics be happier? If any other company but Apple did this, would critics voice the same opinion?

But Apple doesn’t apply their own policies consistently and to their own apps!

I do agree that Apple can do better both in applying their rules consistently and in showing whether their own apps are subject to the same rules. With the regard to the first part, Apple does have a relationship with app developers, even though when it comes to shove, the relationship with the end users allows Apple to wield more bargaining power. Nonetheless, it is important for the company to foster the bond with developers. One way to do so is to be more transparent with the App Store guidelines, especially in its actions, and more consistent in their application of these guidelines.

Disclosing the extent to which their own apps are subject to the same App Store rules is a bit more nuanced in my opinion. I don’t think it would change anything if Apple told us Apple’s digital content or subscriptions were subject to the same 15%/30% commission rule. After all, Apple would pay that money back to themselves. If their overall business continues to grow and their margin stays flat like it has for the past few years, does it really matter if a few of their services are unprofitable or not? With that being said, I really think Apple should subject themselves to the guidelines that other apps are and show it to developers. It’s fair to do so and it will help build the relationship with developers. Indeed, pre-loading their own apps such as Apple Music gives it more advantage over Spotify. But as long as Apple doesn’t outright block Spotify or do anything that prevents their competitors’ apps from being downloaded for no reasons, it’s not an egregious abuse of power. That’s just Spotify being subject to the rules of Apple when leveraging the relationship with iOS users.

In sum, 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.

In my opinion, relationships with customers become more difficult to maintain over time. Customer preferences change. Old competitors compete harder. New competitors come in to disrupt. Regulations can be detrimental. Culture and leadership can weaken over time. Freak events like Covid-19 can happen. All sorts of problems to tackle. A strong position today doesn’t warrant a strong position in the future. The same applies to Apple. If they labor to maintain their competitive advantages in the future, kudos to them and we should be as generous in our appreciation for such an achievement as in our effort to criticize them and to keep them honest.

Disclosure: I own Apple, Facebook, Amazon and Spotify stocks in my portfolio.

Book Review: Exercised – Why Something We Never Evolved To Do Is Healthy and Rewarding

I learned of this book from a Twitter account that I follow. The book looks at exercise from the anthropology and biology perspective to answer a few key questions such as:

  • Did we evolve over thousands of years to exercise? Or did we evolve not to spend more energy than we should? Why is exercise such a struggle for many?
  • Why is sitting harmful to our body?
  • How much exercise is enough? What exercise should we do?

The book is jam-packed with research and studies that serve as corroborating evidence of the points that the author tries to make. It must have taken him a long time to dig into hundreds of research like that, including trips to remote places so that he could live with ethnic tribes whose lifestyle is so different from ours dominated by modern technologies. Clearly, the author knows what he is talking about. Even though it’s very research-oriented, the book is well-written and engaging. I do admit that I got tired at times due to its overwhelming length and the number of topics packed in one volume, but for the most part, it was time well spent and an enjoyable read.

The core message of the book is nothing new: Exercise is great for our health and rewarding. But this book offers a little bit more insights into how we can integrate exercise into our daily routine more easily, why certain things happen and how we should design exercise that can benefit us more, especially when we age. I am fairly certain that readers will get away from reading this book with some new knowledge. Below are some of my notes:

“Imagine you have been asked to conduct a scientific study on how much, when, and why “normal” people exercise. Because we tend to think of ourselves and our societies as normal, you’d probably collect data on the exercise habits of people like you and me. This approach is the norm in many fields of inquiry. For example, because most psychologists live and work in the United States and Europe, about 96 percent of the subjects in psychological studies are also from the United States and Europe.

Such a narrow perspective is appropriate if we are interested only in contemporary Westerners, but people in Western industrialized countries aren’t necessarily representative of the other 88 percent of the world’s population. Moreover, today’s world is profoundly different from that of the past, calling into question who among us is “normal” by historical or evolutionary standards. Imagine trying to explain cell phones and Facebook to your great-great-great-grandparents. If we really want to know what ordinary humans do and think about exercise, we need to sample everyday people from a variety of cultures instead of focusing solely on contemporary Americans and Europeans who are, comparatively speaking, WEIRD (Western, Education, Industrialized, Rich, Democratic)

Excerpt From: Lieberman, Daniel. “Exercised : Why Something We Never Evolved to Do Is Healthy and Rewarding

“Which brings us back to physical inactivity. From the perspective of natural selection, when calories are limited, it always makes sense to divert energy from nonessential physical activity toward reproduction or other functions that maximize reproductive success even if these trade-offs lead to ill health and shorter life spans. Stated simply, we evolved to be as inactive as possible. Or to be more precise, our bodies were selected to spend enough but not too much energy on nonreproductive functions including physical activity”

“So let’s banish the myth that resting, relaxing, taking it easy, or whatever you want to call inactivity is an unnatural, indolent absence of physical activity. Let’s also refrain from stigmatizing anyone for being normal by avoiding nonessential exertion. Unfortunately, we have a long way to go. According to a 2016 survey, three out of four Americans think obesity is caused by a lack of willpower to exercise and control appetite.27 Despite stereotypes of non-exercisers as lazy couch potatoes, it is deeply and profoundly normal to avoid unnecessarily wasting energy. Rather than blame and shame each other for taking the escalator, we’d do better to recognize that our tendencies to avoid exertion are ancient instincts that make total sense from an evolutionary perspective.”

Excerpt From: Lieberman, Daniel. “Exercised : Why Something We Never Evolved to Do Is Healthy and Rewarding

“Although most fat is healthy, obesity can turn fat from friend into inflammatory foe. The biggest danger is when fat cells malfunction from overswelling. The body has a finite number of fat cells that expand like balloons. If we store normal amounts of fat, both subcutaneous and organ fat cells stay reasonably sized and harmless. However, when fat cells grow too large, they distend and become dysfunctional like an overinflated garbage bag, attracting white blood cells that trigger inflammation”

“A second way lengthy periods of sitting may incite widespread, low-grade inflammation is by slowing the rate we take up fats and sugars from the bloodstream. When was the last time you had a meal? If it was within the last four or so hours, you are in a postprandial state, which means your body is still digesting that food and transporting its constituent fats and sugars into your blood. Whatever fat and sugar you don’t use now will eventually get stored as fat, but if you are moving, even moderately, your body’s cells burn these fuels more rapidly. Light, intermittent activities such as taking short breaks from sitting and perhaps even the muscular effort it takes to squat or kneel reduce levels of fat and sugar in your blood more than if you sit inertly and passively for long.38 Such modest extra demands appear to be beneficial because although fat and sugar are essential fuels, they trigger inflammation when their concentrations in blood are too high.39 Put simply, regular movement, including getting up every once in a while, helps prevent chronic inflammation by keeping down postprandial levels of fat and sugar.

Excerpt From: Lieberman, Daniel. “Exercised : Why Something We Never Evolved to Do Is Healthy and Rewarding

“These ubiquitous miniature batteries, which power all life on earth, are called ATPs (adenosine triphosphates). As the name implies, each ATP consists of a tiny molecule (an adenosine) attached to three molecules of phosphate (a phosphorus atom surrounded by oxygen atoms). These three phosphates are bound to each other in a chain, one on top of the other, storing energy in the chemical bonds between each phosphate. When the last of these phosphates is broken off using water, the tiny quantity of energy that binds it to the second phosphate is liberated along with one hydrogen ion (H+), leaving behind an ADP (adenosine diphosphate). This liberated energy powers almost everything done by every cell in the body like firing nerves, making proteins, and contracting muscles. And, critically, ATPs are rechargeable. By breaking down chemical bonds in sugar and fat molecules, cells acquire the energy to restore ADPs to ATPs by adding back the lost phosphate. The problem is, however, that regardless of whether we are hyenas or humans, the faster we run, the more our bodies struggle to recharge these ATPs, thus curtailing our speed after a short while.”

“Sugar is synonymous with sweetness, but it’s first and foremost a fuel used to recharge ATPs through a process termed glycolysis (from glyco for “sugar” and lysis for “break down”). During glycolysis, enzymes swiftly snip sugar molecules in half, liberating the energy from those bonds to charge two ATPs. Restoring ATPs from sugar doesn’t require oxygen and is rapid enough to provide almost half the energy used during a thirty-second sprint. In fact, a fit human can store enough sugar to run nearly fifteen miles. But there is a consequential catch: during glycolysis the leftover halves of each sugar, molecules known as pyruvates, accumulate faster than cells can handle. As pyruvates pile up to intolerable levels, enzymes convert each pyruvate into a molecule called lactate along with a hydrogen ion (H+). Although lactate is harmless and eventually used to recharge ATPs, those hydrogen ions make muscle cells increasingly acidic, causing fatigue, pain, and decreased function. Within about thirty seconds, a sprinter’s legs feel as if they are burning. It then takes a lengthy period of time to slowly neutralize the acid and shuttle the surplus lactate into the third, final, but long-term aerobic energy process”

Excerpt From: Lieberman, Daniel. “Exercised : Why Something We Never Evolved to Do Is Healthy and Rewarding

“If you keep up a regimen of two sessions a week of HIIT, your muscles will gradually improve their ability to produce high, rapid forces in part by augmenting how many fibers contract simultaneously when stimulated by nerves. In addition, your muscles will change composition. Although HIIT cannot stimulate your body to produce more fast-twitch muscle fibers, the ones you have will thicken, making you stronger and hence faster. On average, sprinters’ muscles are more than 20 percent thicker than distance runners. HIIT can also modify slower, more fatigue-resistant pink fibers into faster, more fatigable white fibers; lengthen fibers slightly, thus boosting their shortening speed; and increase the percentage of fibers in a muscle that contracts, thereby increasing force. But these and other changes don’t happen on their own, and require constant effort to maintain. If you want to run faster, you have to try to run faster.”

“The benefits of regular HIIT go well beyond its effect on muscles. Among other payoffs, HIIT increases the heart’s ability to pump blood efficiently by making its chambers larger and more elastic. HIIT also augments the number, size, and elasticity of arteries and increases the number of tiny capillaries that infuse muscles. HIIT further improves muscles’ ability to transport glucose from the bloodstream and increases the number of mitochondria within each muscle, thus supplying more energy. These and other adaptations lower blood pressure and help prevent heart disease, diabetes, and more. The more we study the effects of HIIT, the more it appears that HIIT should be part of any fitness regimen, regardless of whether you are an Olympian or an average person struggling to get fit.”

Excerpt From: Lieberman, Daniel. “Exercised : Why Something We Never Evolved to Do Is Healthy and Rewarding

“And therein lies an important lesson about why we exercise. Because exercise by definition isn’t necessary, we mostly do it for emotional or physical rewards, and on that horrid April day in 2018, the only rewards were emotional—all stemming from the event’s social nature. For the last few million years humans rarely engaged in hours of moderate to vigorous exertion alone. When hunter-gatherer women forage, they usually go in groups, gossiping and otherwise enjoying each other’s company as they walk to find food, dig tubers, pick berries, and more. Men often travel in parties of two or more when they hunt or collect honey. Farmers work in teams when they plow, plant, weed, and harvest. So when friends or CrossFitters work out together in the gym, teams play a friendly game of soccer, or several people chat for mile after mile as they walk or run, they are continuing a long tradition of social physical activity.”

Excerpt From: Lieberman, Daniel. “Exercised : Why Something We Never Evolved to Do Is Healthy and Rewarding

“In the end, the 2018 HHS panel concluded that some physical activity is better than none, that more physical activity provides additional health benefits, and that for “substantial health benefits” adults should do at least 150 minutes per week of moderate-intensity or 75 minutes per week of vigorous-intensity aerobic physical activity, or an equivalent combination of the two. (Moderate-intensity aerobic activity is defined as between 50 and 70 percent of your maximum heart rate; vigorous-intensity aerobic activity is 70 to 85 percent of your maximum heart rate.) They also reaffirmed the long-standing recommendation that children need an hour of exercise a day. Finally, they recommended everyone also do some weights twice a week.”

Excerpt From: Lieberman, Daniel. “Exercised : Why Something We Never Evolved to Do Is Healthy and Rewarding

“Aerobic exercise additionally stimulates the growth and upkeep of just about every other system in the body. Within muscles, it increases the number of mitochondria, promotes the growth of muscle fibers, and increases their ability to store carbohydrates and burn fat. In terms of metabolism, it burns harmful organ fat, improves the body’s ability to use sugar, lowers levels of inflammation, and beneficially adjusts the levels of many hormones including estrogen, testosterone, cortisol, and growth hormone. Weight-bearing aerobic activities (alas, not swimming) stimulate bones to grow larger and denser when we are young and to repair themselves as we age, and they strengthen other connective tissues. In moderation, aerobic exercise stimulates the immune system, providing enhanced ability to ward off some infectious diseases. And last but not least, aerobic exercise increases blood flow to the brain and elevates the production of molecules that stimulate brain cell growth, maintenance, and function. A good cardio workout really does improve cognition and mood.”

Excerpt From: Lieberman, Daniel. “Exercised : Why Something We Never Evolved to Do Is Healthy and Rewarding
Physical Activity Guidelines for Americans. Source: HHS

Weekly reading – 6th February 2021

What I wrote last week

My summary of Microsoft’s latest earnings, a giant with growth momentum

My estimate on Azure revenue

Bezos is stepping down (not really a shock), but Amazon is in a great shape

Business

I don’t always agree with all Ben’s takes, but his presentation here is pretty well-done

The NYTimes looked at the current infrastructure for electric vehicles which are becoming a force in the near future

It seems that Amazon’s struggles with its Game Studio come from the top

Apple in 2020: The Six Colors report card

A profile on Kaishou

The Facebook Oversight Board’s First Decisions: Ambitious, and Perhaps Impractical. A pretty good writeup on the first 5 decisions by the FOB. I think it’s great that the FOB came out swinging to prove at least up to now it’s not for show and it’s for business. It’s also great that it doesn’t put too much weight on the operationability of its decisions. That way, the decisions seem more dialogic and as a guide instead of being contaminated by expenses and profits.

Forbes’ writeup on Chegg, a subscription company that lets you solve your homework with the help of an army of experts from India. Every business needs to make money. That I can understand. But if somebody comes out and says that it encourages cheating, they also have a point.

A story on the implosion of Ample Hills, which was once Brooklyn’s hottest ice cream brand

The latest investment letter from RGA

What I found interesting

A professional photographer took incredible photos of the glaciers in Alaska, using iPhone 12 Pro Max

Have a look at an interesting mushroom farm in Vietnam

The ridiculous lack of understanding on Section 320 from lawmakers doesn’t seem limited to Republicans because Democrats have it too

An interesting piece on Arthur Hayes, the founder of BitMEX

Interesting stats

Another horrifying story about the US healthcare. I can’t believe what I read. A new parent had to deal with their newly born child being sick and the insurance company relied on red tape and the flaws of the system to exploit their customers. Imagine the horror of receiving a $270,000 bill.

US Distilleries made $31 billion in revenue in 2020, due to Covid-19. Premium liquor rose in popularity among consumers

In 2020, nearly 1 million Gen-Zers opened a trading account at Apex Clearing, most likely through a broker, with the average age of 19.

App downloads in January 2021 from Bank of America

Someone compiled data on customers for Fintech firms

Zelle processed more than $300 billion in 2020