Breakdown of Formula One, a fascinating business

Patrick O’Shaughnessy released a wonderful podcast episode on Formula One as a business. If you are not familiar with the sport, Formula One is the pinnacle of motorsports. It features more than 20 races in a calendar year around the world with 10 teams, some of which are iconic brands such as Ferrari, Mercedes, Aston Martin, McClaren or Renault, and, arguably, 20 best drivers that we have to offer. Teams compete for driver and constructor championships. The higher a constructor finishes in the standing at the end of the season, the more money it receives. The more successful a driver is, the higher salary he can demand. The likes of Alonso, Vettel, Verstappen and Hamilton earn between 10 – 40 million dollars a year. These cars can easily hit 180mph on the straights and take corners at a speed that normal cars have on a highway. This is a sport that uniquely combines entertainment, legacy, world-class engineering, science, data analysis, drama and strategy.

I have been a fan of Formula One half of my life. While I am pretty familiar with the sport, I still get to learn about the business from this podcast episode. If you want to know about the sport itself or if you are looking to learn about the business, have a listen. It’s definitely worth the time. Here are some of my notes:

Even though Formula One has a big global fanbase, it is still somewhat under-monetized, compared to other sports

There are 400 million or so unique fans globally. And just to give you a comparison point there, the NFL might have more like a hundred million. And even the Premier League is probably closer to 300 million. And the Premier League is truly a global sport in some ways, even though the avid fans are more regional and local. And so there’s just a huge fan base here. And the fans are really, almost all of them, tend to be avid because it’s such a technical sport. Now the Drive to Survive series on Netflix has changed that a little bit with a little bit more of the casual fan coming in, which is why there’s probably an opportunity to grow that 400 million number even further. But it is one of the largest, if not the largest league in the world by the fan base, depending on what metric you use.

Just to step back and stay at the macro level, for a second, we talked about $2 billion of revenue, more or less, and 400 million fans. So if you want to think about it, that’s about $5 of monetization per unique fan. In the NFL, we talked about 16 billion with about a hundred million fans. So that’s over $150 per unique fan. The premier league does 6 billion in revenues with 300 million, that’s $20 per unique fan. So without getting into the specifics for a second, if you just step back and say, what’s the opportunity to monetize, it’s there. It’s just, it’s there. Right? So now the question is, how do you go execute that?

Breakdown of revenue: 33% from promoter fees, 33% from broadcast, 15% from sponsorship & advertising and the rest from paddock club

Absolutely. There are three main primary drivers of revenue. The first is race or promoter fees. Those are essentially the fees that a local partner pays Formula One to host a race. Formula One isn’t actually putting on the race itself. It charges a fee to a local partner, who then hosts the race, sets up the race track, sets up all the entertainment around the race. And that’s just under a third of revenues today.

The second bucket is broadcast revenues, obviously just transmission of the broadcast, rights at the sport, across the world to different broadcast partners. That’s just a touch over a third of revenues. And then finally there’s sponsorship and advertising today. That’s about 15% of revenues. Though, I would say that’s probably where there’s the most opportunity for growth versus the other two.

There’s a final bucket, let’s call it, which is, other. That’s about 15% of revenues as well. The primary driver there is paddock club revenues. So paddock club is essentially the VIP section at a race and the league, Formula One has the right to sell tickets to that and to host the VIP section in a handful of races. And so that’s kind of the biggest driver. There are other drivers. Formula One’s involved with Formula Two and Formula Three racing, kind of the minor leagues, if you will, and generate some revenue from there. There is some revenue tied to transporting the team’s cars around. There’s a fleet of 747s that basically help this circus go from one spot to the other around the world. But those are all lower margins if you will than the primary three. So even though it might be 15% in that final bucket of revenue, it’s a smaller portion of profits. And so I would really think of the big three that we just talked about as the primary drivers of the business.

Promoters can pay more than $30 million for a race, but those who pay the highest fees tend to generate the most revenue and profits. Vietnam GP was cancelled twice because of Covid. I wonder how much we paid the sport to host the race

If you want to think about the way that revenue works, is, as you said, the promoter will usually agree to pay a fee to Formula One. That fee can be anywhere from near zero, which is what a Monaco is given the historic importance and historic relationship that city, it’s not even a race track, has had with the sport. Typically, you’ll have a group of what they call core races in Western Europe that might pay more like a 10 to 20 million fee depending on the race. And again, these are individually negotiated. They are not publicized, so they’re not readily available. Nobody likes to talk about them. And then finally, you have flyaway races. These are races and kind of the emerging world where usually the promoter or the government has an interest in trying to use the F1 name to bring tourism or to bring some of that VIP pizazz, if you will, to the local market where you’ll see 30 million-plus race fees.

And there’s been a big debate about whether or not fees that are paid are sustainable. In other words, do the promoters get to generate a return on that. It’s very expensive to put on a race like this. The FIA requirements for a Formula One race track are very high. You can imagine if you have a car going at the speeds these things are going at, potholes are not okay. And so things just have to be exacting standards. That said, I think there is good evidence that it’s funny, the relationship to the profitability of a race versus the fee to a race is not direct. So some of the more profitable races also happened to be the highest fee races. It’s really increasingly become evident that it’s how well someone does at monetizing the race itself. How good a job do you do, creating demand for the sport? How much of a show do you put on? Do you have concerts? Tier one musical acts? Do you bring in different famous people to kind of try to draw more attention to it? Do you start tiering your offering so that there’s something even beyond the paddock club, VIP club that you can charge even more for? And the best promoters are very good at doing that and can pay high fees and yet also generate a profit. And some of the promoters have a harder time doing it.

Formula One has a few costs it bears, mainly around creating the broadcast, which then it resells to its broadcast sponsors. But in terms of actually putting on the race, all of the costs associated with that are with the promoter. And then the primary revenue is ticketing. As you said, sometimes it doesn’t include VIP because the squeak has kept it, in some agreements, it does. And then like you said, Austin does a very good job. For example, they’ll have a, usually a headline musical act associated with it. If you buy a higher-tier ticket, you can get access to that act. And so they can create some monetization that way.

Formula One from the perspective of an OEM

…There are two OEMs and an FMCG consumer business, they really view this in a holistic way with their core businesses, in terms of brand building and advertising. Mercedes has come out and said, they think there’s $1 billion of advertising equivalent value to being a part of Formula One. Ferrari talks about it in their public filings, about how Formula One is a key competitive advantage for the brand and strategic folks for the brand. For Ferrari, I mean their primary marketing budget is F1. That’s how they market the business. If you go to a race, they have their own club. All the Ferrari owners in the local market come to those races and are hosted there. It’s a huge part of that brand, its history, and its success.

And Mercedes similarly, and Red Bull, a little bit different, not so much an OEM, but essentially that whole idea of an extreme sport and 200 miles per hour plus cars are pulling multiple Gs, it certainly fits that bucket. McLaren is a little bit different. McLaren is essentially a racing team. They’ve now created an OEM out of that. McLaren started as a racing team and that was kind of their singular focus, and they and Renault, which obviously is another OEM, certainly see value in terms of the brand. Now they’re both OEMs where the racing team, in McLaren’s case, was the primary driver. And in Renault’s case, they, like Ferrari and like Mercedes, see value for the brand in being part of the sport. And they’ve been able to spend more as a result and kind of, not quite as much as the largest teams historically, but enough to be competitive year in and year out.

My thoughts

Formula One is in a unique position because there is nothing else like it in the world and Liberty Media has a complete monopoly over the commercial side. Yes, there are many sports that, like Formula One, love to attract eyeballs and money from viewers, but it is not a zero sum game in this case. People can pay and spend time to watch Premier League and Formula One at the same time. In some situations, you pay for a TV subscription and can watch multiple sports, including Formula One. Even with that unique advantage, the monetization of the sport, in comparison with that of others, shows that there is a lot of value to unlock. There are countries where Formula One presence and popularity leave much to be desired. Take America, for example. It’s arguably the biggest media market in the world. Haas team is owned by an American and the country is going to host two races soon. Yet, not a lot of people in this country understand Formula One, let alone coughing up some money to watch it.

The question now is how Liberty Media can make the sport more understandable and accessible. On the surface, Formula One looks to be simple and even boring. 20 cars complete the same track layout multiple times in 2 hours to determine the standing. Mercedes has won the last 7 driver and constructor championships in a row. What else is there to watch for, right? But the beauty of the sport lies in the intricacy and complexity that are not often understood. How does a shift of a couple of degrees on the track surface change the competitiveness of the cars drastically? Why does a team opt for a two-stop strategy while its rival goes for one stop only? Why are some cars fast on soft tires and others on harder tires? How can drivers find more lap time?

Unfortunately, these details are often glossed over and not explained well on TV to average viewers, myself included. If viewers don’t fully grasp the beautiful complexity of the sport, they won’t fully get the appeal of Formula One. When they don’t get the appeal of Formula One, that effect will cascade down into the commercial side, particularly the promoters, broadcasters & teams. But if Liberty Media can bring the sport closer to viewers, fans will engage and pay more. Then, promoters are more willing to pay to host races as there is always a limit on how many races can take place every year. Broadcasters will also put up more money to earn the rights to broadcast races. This influx of money will directly benefit teams which, in turn, will be more committed to making the spectacle more spectacular.

On this note, I have been very pleased with what Chase and Liberty Media have done so far. The series Drive To Survive on Netflix has been a hit and a great user acquisition tool. There has been a lot of interest on Twitter in Formula One out of the series. According to Sportpromedia, “a recent study published by Nielsen even cited the docuseries as a key reason for the sport’s increasing popularity among those aged between 16 and 35, who accounted for 77 per cent of Formula One’s audience growth in 2020.” It really is a nice place to start if you want to learn about Formula One.

In addition, Liberty Media has created some great content on YouTube that helps average viewers understand more the technicality embedded in the sport. Take this one as an example. This is how drivers and their engineers can use data to identify where on a track they lose time and what correction actions they can take. It’s hard enough to correct how you approach a corner with a normal vehicle. These guys have to do it at an insane speed. Or this video which helps explain in layman’s terms some of the common phrases used in Formula One such as oversteer, understeer, apex…Understanding these terms will enable viewers to get why some teams and drivers struggle with their pace than others.

In short, I am really glad that the sport I love is getting more recognition and interest that I think it deserves. Liberty Media has done a great job so far with the marketing and some important behind-the-scenes issues such as Concorde Agreement that can ensure the sustainability of Formula One. I really look forward to two things: a Grand Prix in my homeland and discussing Formula One with more people here in the U.S.

Weekly reading – 19th June 2021

What I wrote last week

A study that revealed people preferred an electric shock to being left alone with their own thoughts

Some interesting comments from Walt Disney CEO on the business

Business

How Ondo’s Customers Using Shop Pay Installments Are Spending 2x More Than Regular Customers. The concept of BNPL isn’t new. What is interesting is that it is now adopted for stuff like socks.

Apple admits why its own Files app was ranked first when users searched for competitor Dropbox. Not a good look for Apple. It does seem that the top brass at the company didn’t know about this issue at all and once the issue was revealed, it was opposed. However, the thing about being the top brass is that you have to take responsible for what your direct reports do.

An interesting presentation on Mistakes of Omission. If you are into investing, this presentation can be very thought-provoking. One of the things that I keep thinking about is whether I am paying too much for a business and whether I unnecessarily increase my average price. I haven’t invested for a long time, but so far, most of my biggest winners happen when I decided to increase my average

A look inside Google’s first store. I hope that Google will use these stores as a showroom to demonstrate to the end users the awesome features it releases every year. Yes, the company isn’t known for making great hardware like Apple is, but the stores’ functionality doesn’t need to be restricted to hardware only. They can be a place to bolster customer relationships and educate end users on a variety of Google services. How many Google features do you not know? How many do you actually know about but haven’t used because they all seem abstract and complex at first glance?

PayPal lowers their rates for U.S merchants on Visa/Mastercard transactions and raised rates for their own products. This is quite a bold move to compete with Stripe, Square and Authorize.net as well as to clearly showcase their position. PayPal is confident enough in the appeal of their own offerings that they think a rate hike is justified. Recently, PayPal has been very aggressive on multiple fronts: engaging merchants and acquiring new users. I got multiple offers from PayPal and Venmo recently from $5 to download the app, $10 to reactivate my Venmo account or $10 to refer a friend.

A couple of interesting posts by CNBC on Roku here and here. I am not working at Roku, so I don’t know what the culture is like. Even if I knew what it was like, it would still be difficult to make a generalization as a culture works for many but doesn’t for others. Still an interesting case study

What I found interesting

I saw millions compromise their Facebook accounts to fuel fake engagement

This is a story about a Japanese diplomat who courageously defied his own government to save hundreds of Jews decades ago. I had never heard of Chiune Sugihara. I am glad that I did this week

I am not a fan of the New York Times nor am I a subscriber. But this investigative piece on the train crash in Mexico City is excellent

Senate passed a bill that would make it easier for folks to unsubscribe online. What can I say? Long overdue. One of the things that rarely come out of the Senate. All those subscription services, especially newspapers outlets, should feel ashamed of themselves for making it overly difficult for consumers to unsubscribe. I hope they will make this kind of shenanigan illegal.

When you are keenly aware of your own struggles but blind to others’, it’s easy to assume you’re missing some skill or secret that others have.

When someone is viewed as more extraordinary than they are, you’re more likely to overvalue their opinion on things they have no special talent in.

Everyone’s dealing with problems they don’t advertise, at least until you get to know them well. Keep that in mind and you become more forgiving – to yourself and others.

Source: Harder Than It Looks, Not As Fun as It Seems

Stats that may interest you

The price of lumber in the US shot up by 377% last year

40% of elementary students in Vietnam are obese, according to the latest survey by the Ministry of Health

Take-aways from the latest interview of Disney CEO

Bob Chapek, the CEO of Walt Disney, attended Credit Suisse 23rd Annual Communications Conference and had some interesting comments on the business. If you are interested in the company or its competitors, it’s really worth a read. Here are a few highlights.

In response to the interviewer’s question on the investments on the experience side in the next 5 years, Bob’s answer was, as follows:

Sure. Sure. Well, we’ve got ambitious plans to expand our business. I had just mentioned Avengers Campus a second ago, and we’re encouraged by the great response we have there, but we’re not stopping there because, as you know, we’ve been undergoing a massive transformation of our Epcot park at Walt Disney World in Orlando. And we’ve got a Ratatouille attraction that we’re bringing in that first premiered in France. We’ve got a new nighttime show Harmonious that will be on the water there at Epcot, and it will be a huge guest pleaser. And then we’ve got our Guardians of the Galaxy: Cosmic Rewind attraction or coaster that will give us our ability to bring that whole Marvel franchise into the park. Internationally, we’re thrilled to bring Zootopia into Shanghai Disney Resort. You mentioned Shanghai.

That’s obviously a property that did extraordinarily well in the box office when Zootopia came out. So that will be a big hit in Shanghai. We’ve got Frozen installations coming into Hong Kong Disneyland. At Disneyland Paris, we’ve got the [indiscernible] of its own Avengers Campus taking off from where Anaheim has. It just recently launched Avengers Campus, and we’ve also got the Art of Marvel Hotel that we’re putting in. We’re installing Tokyo Disney Resort. We’ve got the 8-themed port over at Tokyo DisneySea.

We’ve got 2 new hotels and attractions going in for Frozen, Tangled and Peter Pan. And then we’ve got 3 new ships and a second island destination. So we certainly have a plethora of new things coming, and that’s really mining all the work that we had done prior to the pandemic and kept working on during the pandemic so that we would not have any sort of glitch in our supply chain of new attractions and experiences for our guests, so we can keep that growth engine of parks going.

Source: Credit Suisse 23rd Annual Communications Conference

That’s an impressive pipeline of investments both in depth and breadth. The company has different types of physical attractions under different brands and themes ranging from hotels, resorts to cruise lines and theme parks, from Frozen, Peter Pan to Disney & Marvel. Despite being badly hit by the pandemic, Disney’s traditional cash cow, their Parks business, is likely going to make up for lost time & money, now that folks are increasingly vaccinated and restrictions are lifted. These assets are difficult to replicate. First of all, they are expensive. Any company that wants to emulate Disney needs to ready their check books for a huge sum of money for initial constructions and yearly maintenance. Second of all, Disney competitors need to also build up a library of themes & characters that relate to consumers and entice them to visit the physical attractions. Disney has spent decades of creating, marketing and distributing content. Their brand name is known and loved by generations of consumers. Even if a competitor has the required resources to invest in content, those resources cannot buy the timeless reputation and name that Disney has.

Netflix is trying to take a page from Disney’s book. It’s building Netflix Shop where merchandise related to their originals is sold. This is the first piece of the puzzle. Netflix is popular among viewers around the world and it has some great originals. Hence, it makes sense for the streaming service to start making inroads into the retail side. However, having an online shop is very different from building giant physical attractions that represent huge fixed costs. It will take a lot more from Netflix to build an empire like Disney’s, but everything has to start somewhere.

Second, when asked about how much IP is there to mine, Bob Chapek had this to say:

Well, I’ve always learned not to underestimate our creative teams, particularly our Marvel creative teams. We’ve got 8,000 characters that we have to mine. And you say, well, 8,000 characters, who knows what these 8,000 characters are. But remember that all of our Avengers, for example, our Avengers characters, when we made the acquisition, weren’t exactly household names. Take Loki, for example. Loki was the most watched season premier ever on Disney+ during its opening week. And no one knew who Loki was even when we got started on this journey on Marvel. No one knew who Iron Man was or Wanda or Vision or Falcon or the Winter Soldier. Black Widow, Shang-Chi, nobody knew who these characters were.

Source: Credit Suisse 23rd Annual Communications Conference

I didn’t grow up reading Marvel comics. Years ago, when characters like The Hulk, Iron Man, Thor or Captain America debuted, I barely knew them, yet they are now some of my favorite. I suspect that many casual viewers will first get to know the likes of Shang Chi and others among 8,000 characters from movies or series by Disney. The ability to build characters and tell engaging stories, especially interconnected ones, over a long period of time is a creative competitive advantage that is hard to match. The last 12 years from the first Iron Man movie to End Game is evidence of such an enduring output of creativity. Does it guarantee future success and repeat of the past? No. But it’s much more assuring than records of many competitors.

Next, when the interviewer asked whether Disney would add an ads-supported plan to Disney+, Bob ruled that possibility out at least in the near future.

Yes. We’re always reevaluating how we go to market across the world, but we’ve got no such plans now to do that. We’re happy with the models that we’ve got. But again, we won’t limit ourselves and say no to anything. But right now, we have no such plans for that.

I support this position by Disney. The flagship streamer, Disney+, is already on the cheap end among streamers with the latest reporting ARPU standing at $3.99. The addition of an ads-supported plan would like drive down ARPU even more. Plus, nobody likes to have their streaming experience tainted with ads. Netflix goes to great lengths and invests a lot of resources to make sure that their viewers have the best streaming experience possible on their platform. Disney is wise to do the same if it hopes to compete with its rival. If the company wants to make money from ads, it has its own media channels to do so.

On what “new content on Disney+ every week” means:

Yes. Our plan is to do — hit that cadence this year in terms of a new product every week. And what we mean by that is a new movie or a series, meaning, a new production or library add every week. And that’s not counting new episodes, if you will, but does count new seasons. So we count new seasons. We don’t count new episodes in that. And something new can be a new movie or a new piece of content or something new added to the library. So that’s how we’re defining that. And that’s the plan right now.

Because Disney+ subscriber base is sufficiently big now, it enables the company to spread the fixed content investments across more than 103 million viewers, giving Disney a cost advantage over other streamers, except Netflix. Additionally, new content helps the company acquire more subscribers who will, in turn, add to the economics advantage mentioned above. What I am unclear about is whether a new weekly content is purely originals or whether it includes licensed IP. If it’s the former, it will be great news for Disney stock bulls, a gift to subscribers and ominous signal to competitors.

Last but not least, Bob Chapek touched upon the impact of price increases on churn:

Yes. In terms of, I guess, an objective way to look at the price value relationship, the growth rate that we’ve experienced on Disney+ sort of stands out as the headline there. But you’re right, we did launch at a very attractive price value opening point. And the first price point — or our first price increase that you mentioned in the first 16 months happened recently, and we’ve seen no significantly higher churn as a result of that. In Europe, as a matter of fact, we took a price increase twice as high as we took domestically more or less. And we — that was with — commensurate with the integration of the Star brand as the sixth brand tile. But our churn actually improved, right? So we took an even higher price increase and our churn improved because we added more content. And I think that investment in the content at attractive price point gets you strong retention, and strong retention, obviously, is one of the key factors towards overall platform growth. And — but that doesn’t mean that in the future as we continue to add more and more great content that we wouldn’t necessarily reflect that in the value that we add and then price it accordingly.

While it’s encouraging to see the current price inelasticity of Disney+, it’s equally important to understand that we don’t have a lot of context here. Disney+ had a low price at launch and even a 3-year bundle at one point. Because the starting point was low and the increase here is not significant in absolute ($1 in the US.), even though customer reception towards the latest price increase was positive, it doesn’t guarantee the same outcome for the next raise. They could plow millions of dollars into content, raise prices yet get spurned by consumers. Furthermore, since we don’t have information on the previous churn, it’s tough to conclude whether the current churn is good. Yes, there was an improvement, but for all I know, it could be upgraded from “disastrous” to “concerning”.

In short, Disney has a lot of great assets and great things going on for them. As the world is gradually opening up with an increasing vaccination rate, it will turbocharge the recovery of a business whose cash cow was terribly affected. On the streaming side, the pandemic was a boost in what I consider largely a two-horse race between Disney and Netflix. Each company has its won advantages and strengths. It’ll be super interesting to see how the market will be in the near future.

People prefer electric shocks to being left alone with their own thoughts

I came across this academic study that focuses on how difficult it is for people to sit alone with their own thoughts. Here is the most interesting part (I put together small paragraphs from all over the article)

Ninety- five percent of American adults reported that they did at least one leisure activity in the past 24 hours, such as watching television, socializing, or reading for pleasure, but 83% reported they spent no time whatsoever “relaxing or thinking”.

Most participants reported that it was difficult to concentrate (57.5% responded at or above the midpoint or the point scale) and that their mind wandered (89% responded at or above the midpoint or the scale), even though there was nothing competing for their attention.

There was no evidence that enjoyment of the thinking period was related to participants’ age, education, income or the frequency with which they used smart phones or social media.

In part 1 of the study, participants rated the pleasantness of several positive stimuli (e.g attractive photos) and negative stimuli (e.g an electric shock). Many participants elected to receive negative stimulation over no stimulation, especially men: 67% of men gave themselves at least one shock during the thinking period compared to 25% of women. The gender difference is probably due to the tendency for men to be higher in sensation-seeking. But what is striking is that simply being alone with their own thoughts for 15 min was apparently so aversive that it drove many participants to self-administer an electric shock that they had earlier said they would pay to avoid.

Source: Just think: The challenges of the disengaged mind

This is simultaneously interesting, embarrassing and frightening. I have one of those disengaged minds. Just sitting alone with my own thoughts is so challenging. I tried to do it multiple times and always found myself looking at my phone. More embarrassingly, at the time of the “transgression”, I was aware of that tendency and had no other distraction competing for my thoughts, yet I still couldn’t keep myself engaged. Yoga has been a greatly positive experience, but whatever progress I may have made is apparently insufficient with regard to being able to sit alone with my own thoughts.

Weekly reading – 5th June 2021

Business

Sweetgreen Bet Big on Naomi Osaka. Then It Doubled Down. As the world becomes more divided nowadays, celebrity endorsements come with a risk that companies have to make uncomfortable decisions at times. This is one of those moments for Sweetgreen and personally I am happy that they support Osaka.

Self-Driving Cars Could Be Decades Away, No Matter What Elon Musk Said. If a company or an executive claims that their company’s bright future relies on self-driving cars, take it with a big grain of salt and ask a lot of questions because that future is highly uncertain and can be decades away.

Apple’s new App Store guidelines put scammers and bounty hunters on notice. Apple just did themselves and almost everyone else a favor by being more detailed and specific about their App Store guidelines. A major criticism of Apple and the App Store is that their guidelines are too ambiguous and not enforced equally. That’s a fair criticism and since Apple wants to hold a complete unchallenged power over the App Store, they can’t expect that we expect nothing, but perfect from them. I doubt this latest development will quell much the frustration by developers, but it’s a positive step in the right direction

An interesting chat between Kara Swisher and Margrethe Vestager on issues such as a global tax, court cases against big techs and potential remedies towards the oversized dominance of the likes of Apple.

Netflix debuted an online shop that sells merchandise related to their hit shows such as Lupin. This is a natural extension of their business. When some of their shows are fan favorites and garner enough following, why not capitalizing on such popularity? After all, that’s what Disney does. You watch Marvel or Disney movies and visit the theme parks for other experiences. I don’t think this is so much about being on level terms with Disney. Instead, this is about generating more margin and revenue.

What I found interesting

Jordan, Russell, Kareem, even the King of Pop — the astonishing mentors who shaped Kobe Bryant. Everyone wants to be like Kobe, but are they ready for the sacrifices and solidarity like Kobe was? Are they willing to go above and beyond for their obsession like Kobe?

Eddy Cue On Why Spatial Audio Is a Game-Changer

Shedding More Light on How Instagram Works. According to this post from Instagram, it uses a lot of data (they call it “signals”) to determine what content you get to see. There are two sides of this. On one side, it can be convenient and good that you get to see more of what you like. On the other hand, it means that Instagram or Facebook knows a lot about you. Had Facebook had a better track record in terms of privacy in the past, it wouldn’t have been a concern. The reality is that I am not sure users really use Facebook’s platforms because they are trustworthy. It’s likely because Facebook owns the biggest platforms in the world and users only use them out of convenience. Nonetheless, appreciate posts like this one

The World’s Northernmost Town Is Changing Dramatically

How the wealthiest in America avoid paying income taxes

In 2011, a year in which his wealth held roughly steady at $18 billion, Bezos filed a tax return reporting he lost money — his income that year was more than offset by investment losses. What’s more, because, according to the tax law, he made so little, he even claimed and received a $4,000 tax credit for his children.

Stats that may interest you

Solar makes up 4.5% of the US’s electricity, up from 0.1% in 2010

Passenger EV sales are set to increase sharply in the next few years, rising from 3.1 million in 2020 to 14 million in 2025.

I started and sustained my fitness habit for 30+ days. Here is what I learned

Yesterday marked the 34th day in a row that I completed my workout targets on the Apple Fitness app. To those who aren’t familiar, there are three rings. The red ring shows how much calorie is burned in a day, the green ring records how many minutes you work out and the blue ring refers to the number of hours in which you stand at least for one minute. I set my goals as 550 Calorie, 50 mins of workout and 11 hours of standing. Here are the lessons I learned after the last 30+ days

My challenge has been going on since 4/25/2021

A sprint or a disciplined marathon

While I could have gone for 1200 Calorie a day, I knew that sort of target wouldn’t be sustainable. I wouldn’t be able to keep that level of commitment for 30+ days. Hence, I set a target that is both challenging enough for me to put in real effort and realistic enough for me to maintain it for a month. Think of it as a choice between a sprint or a marathon. You can run at a high speed, but that burst of energy won’t last for long. After a couple of days of heavy workout, I’d probably take it easy the next day and completely fail the challenge. In some cases, rest would be precisely what my body requires. But I chose not to give myself that excuse. So, before you embark on a similar challenge, think of an appropriate goal for yourself. You can slightly low-bar it in the beginning and raise it gradually in the process. Just don’t start too big and fail too soon.

Pulling through the moments of demotivation matters

There were days when I woke up feeling energetic and couldn’t wait to start a workout. On the other hand, there were days when my level of motivation was low. You know what it feels like: a bad sleep, mood swings, effect from a gloomy weather, stress from work, fights with your loved ones. I had plenty of that during my challenge. There were times when I had to pull late workouts or put everything I had into a HIIT because I was behind. It’s tough to force your mind to go through those moments and commit to the mission at hand. But. I guess it’s one of those things that can help me mentally deal with other aspects of my life. As I am fully vaccinated, it increasingly becomes difficult to stay here and not to be able to return to Vietnam to visit my family, friends and girlfriend. It’s tough, but I definitely feel this little challenge helps a bit.

Yoga or HIIT

At 550 Calorie, I couldn’t sit around all day and meet the quota. Usually a long yoga or at least 20 mins of HIIT is necessary to get the job done. The question now becomes whether I am up for spending an hour on yoga or sweating out with maximum effort for 20 minutes. When your days are overburdened with commitments, a HIIT is a better option, but do you have the mental fortitude to go through 20 minutes of hard work? When your energy level is high enough for a HIIT but your body is sore from the day before, are you patient and committed enough to complete an hour of yoga? The same applies to real life. I am sure my writing would be a lot better if I spent 10-12 hours a day without a job on writing. The progress in a short period of time would be significant. On the other hand, I could choose to write less intensely but over a period of time and with a financial cushion from a day job. The progress would take more time obviously. What then is your preference in that case?

Sometimes it’s just too late

Here is how the Stand ring works. To record one hour on the ring, you have to stand for at least one minute straight during a clock hour. Somehow the motion tracking on Apple Watch can see if you are standing or sitting. It means that if you set your goal at 11 hours of standing like I do, you can’t load up everything by standing for 11 minutes straight in one hour and call it done. You have to stand for at least one minute between 7am and 8am, another between 8am and 9am, so on and so forth.

I have a friend whom I am doing this challenge with. One time, he texted me around 8:30pm and said that he still had 5 more Stand hours to go to meet his daily goal. I told him that he wouldn’t meet it that day because he only had 4 available hours left at most. The lesson here is that if you don’t consciously plan and start your standing early enough during the day, you likely won’t be able to succeed. It’s like coming into a 60-minute exam whose questions require at least 25 minutes to complete, when there is only 20 minutes to go. Or if a flight is about to take off in 30 minutes and you are still at home that is about 30 minutes or less away. Sometimes, it doesn’t matter how much money or effort you put in, time’s not available to buy.

Weekly reading – 29th May 2021

What I wrote last week

My review of Amazon Unbound

Business

A long post that outlines a bull thesis on Peloton

An excellent review of the new Apple store in Rome. Apple’s retail stores are great valuable assets. They build up the brand image of the company and function as hubs where customers can try out products, receive services and just really connect with the brand.

Instacart kicks off Priority Delivery. This new move by Instacart to deliver items in 30 minutes shows how cut-throat this market is. Competitors such as Instacart, Uber Eats or DoorDash strive to cut the delivery time to gain customers and market share. What remains to be seen is how it would affect Instacart’s bottom line. I don’t think that they are profitable yet. So, we’ll see when they release their S-1.

DoorDash and Uber Eats Are Hot. They’re Still Not Making Money. A pretty telling piece on delivery services

Amazon Briefing: A look inside Amazon’s cloud gaming ambitions

What I found interesting

Financial and emotional risks of working for a startup. Somebody took the time to write about the potential downsides of working at a startup. There are a lot of things to love about startup life and I am pleased to see people talk about it. But it’s also important to shed light on the risks as well

Google now lets you password-protect the page that shows all your searches. Privacy and security are powerful user preferences that are NOT going away any time soon. In fact, they will only get stronger. Google should do more and talk more about what they do in this area. I haven’t seen a lot of marketing efforts in talking about their initiatives to protect user data and privacy

How a Japanese Company Cut 80% of the Time Needed to Manually Count Pearls

Payment links from Stripe. This is what innovation should be

No, Millennials Aren’t Poorer Than Previous Generations. What stood out for me is that Millennials have more non-mortgage debts.

Stats that may interest you

As of 5/24/2021, 40%, 43% and 62% of Airbnb bookings for the summer of 2021 in Seattle, LA and NYC respectively were more than 28 days

75% of Target’s digital orders were fulfilled by their stores. 30 million Americans shop at Target every week

2.5% – 3.5% is what Costco reported as inflation in the latest quarter

iMac 2021’s thickness is 11.5mm, 1 mm slimmer than iPhone 2

Overwork Killed More Than 745,000 People In A Year, WHO Study Finds

Book Review – Amazon Unbound

Brad Stone followed his first book on Amazon “The Everything Store” with “Amazon Unbound” ten years apart. Similar to its predecessor, this book is the result of extensive research and journalism on the company that captures the imagination and admiration of the public and millions around the world. How much you like this book depends on how familiar you are with the company and its enigmatic and iconic founder, Jeff Bezos. Personally, having read quite a bit on both, I didn’t find some chapters very useful or interesting because I didn’t think it was necessary for me to know in details what happened internally. With that being said, I did find the book worth the time. If you are fond of business and Amazon, give it a try! Below are a few things that stood out for me

Bezos’ ability to think big and delegate

The chapters on the development of Alexa, Amazon Go, Indian market as well as the acquisition of Whole Foods is interesting. In these chapters, readers can see how Jeff’s ability to think big and push his team to think big resulted in unfathomable success. His vision and boldness led the team to enduring long working hours for years and challenges, both technically and from the market, to introduce services and products that have proven to be strategic assets to Amazon. His genius also lies in his willingness to delegate big & important projects to his team. His previous Technical Advisors led the charge on Alexa, AWS and India. In addition to opportunity and resources, Bezos also provides oversight and counsel, and often the push that his team needs to think big.

“By then, Amazon’s China bet was souring, so Bezos did not want to relinquish his shot at what seemed like the world’s next largest prize. In most OP1 sessions, he usually spoke last, not to sway the group with his formidable opinion. But this time, he interjected while Agarwal was still giving his presentation. “You guys are going to fail,” he bluntly told the Indian crew. “I don’t need computer scientists in India. I need cowboys.

“Don’t come to me with a plan that assumes I will only make a certain level of investment,” Bezos continued, according to the recollection of two executives who were there. “Tell me how to win. Then tell me how much it costs.” Another Indian executive at the meeting, Amit Deshpande, says the message was: “Go big and take risks. Make it happen. We have your backs.”

Excerpt From: Brad Stone. “Amazon Unbound.” Apple Books.

“Bezos and his employees riffed on the idea over email for a few days, but no further action was taken, and it could have ended there. Then a few weeks later, Hart met with Bezos in a sixth-floor conference room in Amazon’s headquarters, Day 1 North, to discuss his career options. His tenure as TA was wrapping up, so they discussed several possible opportunities to lead new initiatives at the company, including positions in Amazon’s video streaming and advertising groups. Bezos jotted their ideas down on a whiteboard, adding a few of his own, and then started to apply his usual criteria to assess their merit: If they work, will they grow to become big businesses? If the company didn’t pursue them aggressively now, would it miss an opportunity? Eventually Bezos and Hart crossed off all the items on the list except one—pursuing Bezos’s idea for a voice-activated cloud computer.

“Jeff, I don’t have any experience in hardware, and the largest software team I’ve led is only about forty people,” Hart recalled saying. “You’ll do fine,” Bezos replied.

Excerpt From: Brad Stone. “Amazon Unbound.” Apple Books.

Even heroes aren’t perfect

Jeff Bezos is known for making his employees put their ideas into a PR FAQ, which is a single pager that summarizes key points on a new product/service, or a 6-page memo that includes analysis and rationale for an idea or a big initiative. I love this approach. I think it makes a lot of sense to ask folks to put thoughts to paper and strengthen their ideas. However, when it comes to Jeff’s own ideas, he sometimes didn’t meet the high standard. Furthermore, Jeff instills the philosophy of “single-threaded leaders” into Amazon. The thinking here is that when somebody is responsible for an initiative, they shouldn’t be distracted by anything else. Jeff’s focus was initially only on Amazon. Over the years, he became distracted by his new girlfriend and his investments in Blue Origin & Washington Post. The book detailed how he missed meetings and went for days without a visit to the office. He was still involved at Amazon, but that’s not the standard of focus that he demands from his employees.

What I took away from this is the reinforcement of the belief that even your heroes are far from perfect. They don’t always practice what they preach. It doesn’t mean they don’t have good ideas, but it also doesn’t mean that they are perfect either. We should look at people, or at least try to, with some grain of salt, instead of blind loyalty or admiration.

“The first, which Bezos proposed in a free-flowing brainstorm session in 2014, started as a notion he called “the steak truck.” Imagined as “an ice cream truck for adults,” the original suggestion was to stock a van or truck with steaks, drive into neighborhoods with lights flashing and horn blaring, and sell them to residents, as Doug Herrington remembered it. It would be convenient and a great deal for customers, since the meat was being sold in bulk. Eventually, the company might even predict demand and eliminate the inefficiencies and wasted food of supermarkets.”

“But the service was never as ubiquitous or as endearing as Jeff Bezos and Doug Herrington had hoped. Internet critics were baffled by the project and sneered at some of the more inexplicable deals (“bidet sprayers for $19.99, 33% off!”). One empty Treasure Truck burst into flames in a West Philadelphia parking lot at 1:30 a.m. Bezos briefly touted the initiative in his 2017 shareholder letter, but an executive on the finance team told me that it never performed particularly well or was close to profitable. If Amazon wanted to arouse excitement and loyalty for its fledgling grocery services, it needed something else entirely—like a unique product that customers were passionate about.”

Excerpt From: Brad Stone. “Amazon Unbound.” Apple Books.

“Well, Bezos had an idea for that as well and it was just as bizarre. In August 2015, the Washington Post published an unappetizing article about how a single hamburger might contain the meat of up to a hundred cows. Sourcing a burger from just a single cow could theoretically produce a superior-tasting patty but that “would be hard and expensive,” a meat distributor told the paper. That caught Bezos’s attention. He seemed to have increasingly adventurous tastes, later sampling an iguana, for example, at a meeting of New York City’s Explorers Club. In another brainstorming meeting with Herrington, he suggested they find a ranch to produce a “single cow burger” and make it a unique item that customers could only buy from Amazon. “I really think you should try this,” Bezos told Herrington, who recalled thinking at first it was a joke. “How hard can it be?”

“The project once again represented a different style of innovation within Amazon. Employees didn’t “work backwards” from their idealized customers, who had never asked for such a creation. They worked backwards from Bezos’s intuition and were catering to his sometimes eclectic tastes (literally). Bezos was right a lot, particularly when it came to cutting-edge technology. But in the end, the single cow burger and other culinary innovations introduced within Amazon Fresh generated little buzz or increased business.”

Excerpt From: Brad Stone. “Amazon Unbound.” Apple Books.

“Still, many Amazon execs and alums would have a hard time moving on so easily. Bezos had always demanded that Amazonians comport themselves with discretion and impeccable judgment. He ripped documents in half and walked out of rooms when employees fell short of expectations. By conducting an extramarital relationship so carelessly that it became fodder for a salacious spread in the National Enquirer and then a high-profile media free-for-all, he had failed to meet his own high standards. Dozens of current and former executives would later say that they were surprised and disappointed by Bezos’s affair. Their infallible and righteous leader was, after all, a flawed human.

The revelations also might have explained some of the more curious changes in his recent behavior. Bezos had been increasingly hard to find in the Seattle offices over the past year; OP1 meetings had been delayed or postponed, and longtime deputies were finding it difficult to get time on his calendar. He was spending more time traveling, colleagues had noticed, and that November had popped up with only a few hours’ notice in the Santa Monica offices of Ring, the connected doorbell startup Amazon had acquired in February 2018.”

Excerpt From: Brad Stone. “Amazon Unbound.” Apple Books.

Dark side of Amazon

Amazon is not an angel. There is a dark side that involves using the practice of leveraging data from 3rd parties for their own advantage and sacrificing smaller merchants for their own profit. Are those practices cringe-worthy and distasteful? Yes. Are they illegal? It’s clearly in the grey right now as the government is still conducting its investigation and no charge has been announced on Amazon yet. Nonetheless, given the threat from the likes of Shopify, these practices can cause concern and fear from 3rd parties, which can ultimately lead to sizable losses and damage for Amazon.

“Wendell Morris largely agreed with that sentiment. The founder of the Santa Monica–based YogaRat was one of the first sellers on Amazon to hawk yoga mats and yoga towels; he later expanded into beach towels and microfiber blankets, all sourced from China. In 2014, he became one of the few Amazon sellers that Jeff Bezos touted by name in his widely read annual letters to shareholders. “The beauty of Amazon is that someone can say, ‘I want to start a business,’ and they can go on Amazon and really start a business,” Bezos had quoted Morris as saying that year. “You don’t have to get a lease on a building or even have any employees at first. You can just do it on your own. And that’s what I did.”

But by the time I talked to him, Morris, like Saunders, had changed his opinion. In 2016, when YogaRat employed seven people, he found that his listings were inexplicably disappearing from Amazon’s search results. He spent hours on the phone with an Amazon customer support staffer in India and wrote pleading emails to Bezos’s public email address. His listings were finally restored, though they never returned to their previous positions at the top of search results. A year later, his seller account was suspended altogether because some of the images on his listings violated Amazon’s guidelines against depicting groups of people in product photos. Morris conceded the error while bitterly showing me how countless other sellers violated the same rules without penalty. Someone—probably a competitor—had singled him out to Amazon’s enforcement team.”

“While Morris scrambled to reinstate his account, other sellers of the same merchandise replaced him atop search results. YogaRat never recovered. He now runs what’s left of his firm alone with his wife, and the challenges are daunting. He is constantly fighting overseas knockoffs of his designs and reviews of his products that mysteriously show up on rival listings. When he calls Amazon customer service, he suspects the reps’ primary metric for success is how quickly they can get off the phone. Once a devoted yogi, Morris can barely stand to look at a yoga mat anymore.”

Excerpt From: Brad Stone. “Amazon Unbound.” Apple Books.

“Aarstol tried to advertise on Amazon to boost his visibility but that gutted his profits. In the years after he was mentioned in Bezos’s letter, he went from employing ten people to three and from recording $4 million in annual sales to less than $1.5 million. “Amazon doesn’t give a shit about brands,” said Aarstol, who by 2020 was almost completely off Amazon and focusing on sales over his own website. “They don’t care whether you live or die.”

Excerpt From: Brad Stone. “Amazon Unbound.” Apple Books.

“Speaking on the condition of anonymity, several private-label managers admitted to exploiting a resource that was even more precious than product reviews—prominence in Amazon’s search results. When they introduced a new brand, like Mama Bear diapers, a practice called “search seeding” allowed the brand managers to pin the initial relevancy score for the new product to the score of an established product, such as Pampers, at least for the first few days. The Amazon product would then appear at the top of search results, rather than starting on the unseen last page with other new brands.

When I asked Doug Herrington whether Amazon changed search results for its private-label products, he flatly denied the practice occurred. “We don’t manipulate search results at all,” he said. He added that Amazon brands were sometimes given prominent advertising slots in search results when they were a “great deal for the customer,” and if customers didn’t respond, the Amazon products quickly vanished. He also compared Amazon’s tactics to those of competing physical retailers, who put generic products like painkillers right next to Tylenol and Advil, taking up limited shelf space. Amazon, on the other hand, had “infinite aisles,”

One who worked on a new lifestyle brand called Solimo said she originally assumed third-party data was off limits when she joined the company in 2016. A year into her job, her boss showed her how to access the sales data and told her to ask Amazon’s data analysts if she needed help. The employee, who asked that her name not be used, subsequently examined third-party sales to determine the fastest-selling vitamin supplements, how many units were sold, and the average selling price and profitability of each.”

Excerpt From: Brad Stone. “Amazon Unbound.” Apple Books.

Other interesting anecdotes

“Logistics employees who worked on the California service said this hub-and-spoke model ended up being inefficient and unreliable; one said that Amazon was “basically stapling a $10 or $20 bill to every order.” The Fresh team also tracked a metric called “perfect deliveries”—when an order was promptly delivered and included every item. They found they were hitting that target less than 70 percent of the time. Grocery industry veterans belittled the effort from afar. “Amazon Fresh is their Waterloo,” John Mackey told me during our chat in 2014. “What’s the one thing people want? Convenience. You can’t do that with distribution centers and trucks.”

“Success in delivering online groceries relied on getting the logistics exactly right and amassing enough demand to make it profitable to send drivers into residential neighborhoods. Amazon had set up warehouses too far from customers, made it too expensive for them to sign up, and saddled them with bulky tote bags and sacks of dry ice after each delivery. Bezos had finally agreed with Doug Herrington that Amazon needed to reinvent its retail business, but they were going to have to find a different way to do it.”

Excerpt From: Brad Stone. “Amazon Unbound.” Apple Books.

“For the next few quarters, Amazon avoided buying Google ads in Mexico and tried to compensate with billboards, radio, and TV ads, and shipping discounts. As Garcia had feared, it hobbled the site. The offline ads were more expensive and less effective. Google brought in $70 billion in annual advertising revenues because search ads worked and were a relatively inexpensive way for websites to attract visitors. “I wanted to see if we could get traction in a country launch without using Google,” Wilke later said, “and it turned out, the answer was no…. We weren’t reaching enough customers.”

Excerpt From: Brad Stone. “Amazon Unbound.” Apple Books.

“Internally the program was called AMPED. Amazon contracted with an Australian data collection firm, Appen, and went on the road with Alexa, in disguise. Appen rented homes and apartments, initially in Boston, and then Amazon littered several rooms with all kinds of “decoy” devices: pedestal microphones, Xbox gaming consoles, televisions, and tablets. There were also some twenty Alexa devices planted around the rooms at different heights, each shrouded in an acoustic fabric that hid them from view but allowed sound to pass through. Appen then contracted with a temp agency, and a stream of contract workers filtered through the properties, eight hours a day, six days a week, reading scripts from an iPad with canned lines and open-ended requests like “ask to play your favorite tune” and “ask anything you’d like an assistant to do.”

The speakers were turned off, so the Alexas didn’t make a peep, but the seven microphones on each device captured everything and streamed the audio to Amazon’s servers. Then another army of workers manually reviewed the recordings and annotated the transcripts, classifying queries that might stump a machine, like “turn on Hunger Games,” as a request to play the Jennifer Lawrence film, so that the next time, Alexa would know.

The Boston test showed promise, so Amazon expanded the program, renting more homes and apartments in Seattle and ten other cities over the next six months to capture the voices and speech patterns of thousands more paid volunteers. It was a mushroom-cloud explosion of data about device placement, acoustic environments, background noise, regional accents, and all the gloriously random ways a human being might phrase a simple request to hear the weather, for example, or play a Justin Timberlake hit.

The daylong flood of random people into homes and apartments repeatedly provoked suspicious neighbors to call the police. In one instance, a resident of a Boston condo complex suspected a drug-dealing or prostitution ring was next door and called the cops, who asked to enter the apartment. The nervous staff gave them an elusive explanation and a tour and afterward hastily shut down the site. Occasionally, temp workers would show up, consider the bizarre script and vagueness of the entire affair, and simply refuse to participate. One Amazon employee who was annotating transcripts later recalled hearing a temp worker interrupt a session and whisper to whoever he suspected was listening: “This is so dumb. The company behind this should be embarrassed!

But Amazon was anything but embarrassed. By 2014, it had increased its store of speech data by a factor of ten thousand and largely closed the data gap with rivals like Apple and Google. ”

Excerpt From: Brad Stone. “Amazon Unbound.” Apple Books.


Weekly reading – 22nd May 2021

What I wrote last week

I gave examples of how prices on Amazon can be much higher than what you can find at retailers

A couple of great clips about soy sauce and its history

A review of Disney’s Q2 FY2021 results

My thoughts on Paypal

Business

A Moneyball Experiment in English Soccer’s Second Tier. Although people are quick to point out that Billy didn’t win a title with his Money Ball method, his team did improve within his limited resources. Barnsley will unlikely win any title, especially the Premier League. However, as long as the team makes it to the top tier and earns more money by just showing up, it should be an astounding success itself.

Why former Google ads boss Sridhar Ramaswamy is building an ad-free search engine. A pretty interesting interview. I wonder what would make such a search engine attractive enough that people would pay to use it. I mean, DuckDuckGo is pretty great and it is privacy-focused. And it’s free.

Panera Bread’s new design transforms it into a neighborhood bakery in a bid to build loyalty. Retailers have to focus on delivering experience. The physical goods are a must, but it’s just part of the puzzle.

What I find interesting

Khmer Temple-Hopping Motorbike Loop | Tra Vinh. Vietnam has a lot to offer in terms of tourism. I’d say that instead of frustrating yourself in touristy places, you should head to destinations like Tra Vinh, which have their own charm, beauty and history. Personally, I prefer Tra Vinh to cities like Nha Trang or Mui Ne.

Hyundai Nexo breaks world record for longest distance travelled in a FCEV. Even though a long distance was achieved with one tank of hydrogen fuel, eventually these cars still need to refuel. Hence, the challenge of propping up fuel stations in popular areas still remains. Unless that is accomplished, there is still a long way to go for fuel-cell-electric vehicles. Though the way got a tiny bit shorter.

Censorship, Surveillance and Profits: A Hard Bargain for Apple in China. Not only is China a $50 billion market for Apple, but it also houses its main irreplaceable yet supply chain. Even a local billionaire hero like Jack Ma disappeared over night and lost his influence after angering the government and President Xi. What chance does Apple have to be anything different? If Apple still wants to do business in China, it has no choice but to do everything it can to balance between appeasing Xi and protecting its customers as well as principles. Some may say that Apple could have pulled out of the country like Google. Well, that’s Google principle. Tim Cook’s principle is to show up because “nothing changes from being on the sideline”. You can disagree with his or Apple’s principle, but you can’t just change it. Additionally, as a Vietnamese, I don’t think it would be much better to relocate all the supply chain to my country. The story would be more of the same. Well, in many countries, it would still be more of the same.

Google Workspace got a huge upgrade. At first glance, the upgrade looks so interesting.

The 1,400-year-old invention Peru is reviving. In the age of technology when our societies are more technologically advanced than ever, ancient techniques tested over the years continue to be effective.

Apple previews powerful software updates designed for people with disabilities

You may soon be able to buy pre-IPO stocks

Stats that may interest you

Ethereum will use at least ~99.95% less energy post merge

There are 3 billion active Android devices

The average age of bridges in America is 44 years

Let’s talk Paypal. No longer merely a P2P player

The story of Paypal started in 1998 when Max Levchin, Peter Thiel and Luke Nosek founded Confinity, a digital wallet company. They later merged Confinity with X.com, launched by Elon Musk, and altogether rebranded the new entity as Paypal. In 2002, the company went public under the ticket $PYPL. Later in the same year oof its IPO, it was acquired by eBay and became the prominent payment option on the famous marketplace. In 2015, Paypal left the eBay family to become a separate and independent entity. Six years later, it is now one of the most trusted brands in the world, available in more than 200 countries and valued at almost $300 billion.

At the core, Paypal provides payment and financial services to both consumers and merchants. Originally, it used to be one of the primary methods of person-to-person (P2P) transactions. Over the years, Paypal has transformed itself into a more expansive platform. Consumers can now use Paypal to send and receive money from others as well as to pay merchants, whether the transactions are online or in stores with debit cards, credit cards, tap to pay and QR Codes. On the merchant side, Paypal offers a host of solutions, including payment processing, marketing tools and financing options.

Paypal's breadth of services
Figure 1 – Paypal’s services. Source: Paypal

As a two-sided platform, Paypal needs one side to feed the other. From the consumer perspective, they only find Paypal useful when they have friends and families on Paypal network. Additionally, Paypal must be accepted at various merchants, whether transactions take place in physical stores or on websites. Otherwise, what would be the point of having a Paypal account? From the merchant perspective, Paypal’s value propositions lie in their payment solution and the brand name as well as trust cultivated with consumers. If consumers didn’t trust or use Paypal, there would be plenty of other alternatives. But that’s also one of their three moats. It’s super hard to be a two-sided platform because of the chicken-and-egg problem. Not only did Paypal have to solve that problem between consumers and merchants, but they also had to deal with it within the consumer space.

Another moat of Paypal is that the company has cultivated trust in consumers and merchants alike with its track record of security. Even though security breaches are almost inevitable to any company, so far Paypal hasn’t recorded too many incidents. When it comes to handling people’s money, security should be at the top of any company’s agenda. I mean, anyone can boast that they can exercise two hours in a row. I don’t doubt it. But it’s a completely different challenge to exercise two hours a day for 30 days in a row, let alone for years. To replicate such a track record, a competitor needs to invest in security and more importantly, it needs time. No matter what a newcomer says about its own security, only time can seed the trust in the constituents of its network. Unfortunately, time isn’t something that human brains or money can buy. And while a newcomer or existing player builds up its track record, Paypal is not likely to stand still. Just look at their M&A activities in the last few years: Venmo & Braintree (2013), Xoom (2015), iZettle (2018), Honey (2019), GoPay & Happy Returns (2021).

Finally, Paypal is operating at an enormous scale. In Q1 FY2021, it processed $285 billion in transactions, growing at 49% YoY. That annualizes to more than $1 trillion. As you may know, scale is the magic in business. Paypal’s gigantic scale should give the company a cost advantage over competitors. Plus, the breadth of Paypal offerings poses a daunting challenge to anyone wishing to match them. Just look at Figure 1 to see how many services are available, not to mention the acquisition of Happy Returns. It’s hard to spread resources and make investments on multiple fronts when you are on the back foot in terms of unit costs. Just to give you an example of what the scale of Paypal’s existing active account base and its brand name can do, let’s take a look at the rollout of Buy Now Pay Later and QR Code. Paypal introduced its Buy Now Pay Later only in August 2020. As of Q1 2021, its Pay in 4 already had over $2 billion in TPV globally, of which $1 billion came from the US. Pay in 4 also had 5 million unique customers. In addition to its popularity and reach, Paypal offers the service to merchants without charge. Normally, merchants have to pay BNPL providers several times the normal interchange, but Paypal is willing to subsidize merchants to gain market share. Also, the company enabled pay by QR Code some time in the latter half of 2020, but it already amassed 1 million merchants as of Q1 2021 that used the service, up from 500,000 two quarters prior.

How Paypal benefits merchants
Figure 2 – Value propositions of Paypal to merchants. Source: Paypal

How does Paypal make money?

We generate revenues from merchants primarily by charging fees for completing their payment transactions and other payment-related services.

We generate revenue from consumers on fees charged for foreign currency conversion, optional instant transfers from their PayPal or Venmo account to their debit card or bank account, interest and fees from our PayPal Credit products, and other miscellaneous fees.

Source: Paypal’s latest Annual Report

In short, Paypal charges merchants on every processed transaction and for other additional services. On the consumer side, P2P transactions don’t yield much revenue, but if consumers want to have instant deposits or have an outstanding unpaid balance on their credit cards with Paypal or Venmo, then the company earns additional fees and interest on the balance.

Take-rates which indicate what Paypal gets in revenue over the transaction volume depend on the kinds of transactions. Normally, bill payments and P2P transactions have low take-rates. Transactions funded using debit or credit cards are more expensive to process than those funded using bank accounts or balance within Paypal or Venmo. Commercial transactions such as those on eBay or cross-border transactions that require a foreign exchange are more lucrative. Obviously, Paypal would love to maximize revenue and profits, but there is necessarily a balancing act to be had here. Although bill payments and P2P have a low yield, they are sticky. They are what keeps users engaged and in the network. Payments is a highly contested industry. Any transactions processed by legacy banks, other providers such as Square or Apple Pay and fintechs are transactions that Paypal loses. Hence, I think for the time being, it’s better for the company’s future that they are prioritizing the growth of the active account base and engagement.

Venmo and Paypal TPV
Figure 3 – Paypal and Venmo TPV
Paypal's active account base
Figure 4 – Paypal’s active account base
Paypal and Venmo YoY Growth in TPV
Figure 5 – Paypal & Venmo YoY Growth in TPV
Transactions per active accounts from Paypal
Figure 6 – Transactions Per Account

In short, I am bullish on Paypal. The company has a brand name known and trusted in many countries around the globe. It has the expertise after spending more than two decades in the industry and the ability to transform itself into a more expansive and competitive entity. It has a nice track record of acquiring other businesses to add needed capabilities. Currently, Paypal is the only Western company with 100% ownership of a Chinese payments company after it acquired 100% stake in GoPay. Additionally, it announced the acquisition of Happy Returns with the aim of offering merchants as well as shoppers convenient return services. As payments are pretty fragmented, I believe Paypal will not have any trouble from regulators with regard to future M&A. Yes, competition is plenty and stiff, but as you may already see at this point, there are reasons to like Paypal and what they are doing.

Disclosure: I have a position on Paypal.