NYTimes is one of the newspapers that saw the writing on the wall a few years ago when it committed to the transition from an advertising-dependent model to a subscription-centric one. Let’s look at their performance.
In Q3 2020, The New York Times recorded more than $300 million in Subscriptions revenue, out of $427 million in total revenue. In other words, 70% of the company’s revenue came from subscriptions. In the meantime, advertising dropped significantly by 30% YoY and made up only 19% of the total pie, down from 26% from the same period last year.
In hindsight, it was a great move of the newspaper to move to subscriptions. Had they not done that, Covid-19 would have wrecked their financials as companies cut back on advertising. The company still needs to look at their revenue growth. Even though 2020 can be excused because of Covid, last year still saw only about 2-3% of YoY revenue growth. Plus, while the company’s gross margin is about 50-60%, their operating margin hasn’t reached two digits for the last 4 third quarters. Since NYTimes doesn’t break out operating margin for segments, it’s hard to tell which fares better than the others.
Despite the fact that the outlet is now focused more on digital products, print advertising still made up for 40% of the company’s ads revenue. However, print advertising dollars dropped significantly this year by 47% YoY, to about $32 million, compared to the 13% drop by digital advertising.
With regard to paid digital subscriptions, the New York Times recorded 6.1 million paid digital subscriptions as of the end of Q3 2020, up from 4.1 million a year ago. When breaking down this digital subscriber base, digital news subscriptions grew by 46% YoY and other digital subs (crosswords and cooking) by 63%. The growth in digital news subscriptions was very encouraging for the news outlet, even though it’s likely that Covid-19 may have had a positive contribution.
Digital News Subs (in thousands)
Other Digital Subs (in thousands)
Digital Subs (in thousands)
Print Subs (in thousands)
Total Subs (in thousands)
Figure 5 – Subscription Breakdown. Source: Company Filings
In short, things look relatively positive for the New York Times. The transition to the subscription-centric model seems like a success. Despite the unprecedented health crisis that we are facing, the company’s business looks resilient enough with great growth in digital subscriptions and momentum. Compared to other news outlets, the paper is miles ahead in terms of paid digital subscription. Even after Trump leaves office, the appetite for quality journalism, whatever “quality” means is in the eyes of the beholders, will still persist, I believe. Whether the company can maintain its appeal to readers or come up with other products to improve revenue growth and operating margin remains to be seen. Personally, I came so close to being a subscriber myself many times, but the Opinion column of the NYTimes put me off with some outlandish articles.
This book is based on interviews with more than 100 people who had indirect or direct experience with Nokia at the time. It’s about what happened between 2010 and 2013 under the reign of the former CEO – Stephen Elop and how Nokia fell apart in a matter of years. The book was originally in Finnish only, but some volunteers created an English version and that version was generously shared with the world for free here.
Nokia was at the peak of its power back in 2005 to 2007. At the time, there were seismic changes in the cut-throat personal phone industry with the introduction of Android and iOS, the iPhones, iPad and the App Store. Nokia, at the time, started to realize it had problems at hand and the CEO wasn’t up to the task. The search for a new CEO culminated with the appointment of a Canadian named Stephen Elop. Stephen introduced a host of initiatives during his time, but couldn’t turn around the fortune of the Finnish giant. The tumultuous reign ended with the controversial acquisition of Nokia by Microsoft, a shocking fate for a brand that just a few years prior had been among the top 5 in the world.
Nokia had a lengthy list of problems. The Board had insufficient industry experience and the Chairman was widely regarded as one of the main culprits for the fall of Nokia. Their go-to-market strategies faltered. For example, Nokia couldn’t have the same relationship with network providers in the US. It didn’t launch early enough the dual SIM feature in India. It also missed a critical Lunar New Year shopping period in China one year. Moreover, their product development couldn’t deliver. They didn’t have the advanced chip used by other competitors at the time. Their feature phones slowly became a thing of the past, but their smartphones couldn’t sell. Nokia couldn’t get developers to develop apps for their new phones and as a consequence, the lack of useful apps rendered their phones less appealing to consumers. The vicious cycle kept going on. Their partnership with Microsoft wasn’t perfect as Windows had a modest market share and developers didn’t have a lot of love for Microsoft at the time.
Nokia had many capabilities and assets at the time. Yet, it failed to address internal problems and respond appropriately to the changes in the external environment. This is a lesson for businesses. Past achievements mean little for survival when there is a lack of responses to the changing environment.
The author made it clear that the book mainly offered another perspective on Nokia and its collapse, rather than had exclusive truth on what actually happened. Also, even though many could fault Elop for the collapse and they might be right, given his managerial blunders, the book made it clear that with all the challenges the company faced at the time, it’s unclear if anyone could do better than him. That’s kinda what I feel. Hindsight bias is the easiest. Anyone could look back and critique others on what they should or shouldn’t have done, especially all these analysts I see on Twitter. The fact and the matter is that inside a company, there is a lot going on. Managing a multi-national company is no easy feat. We can and should keep the powerful honest and in check, but we shouldn’t be too arrogant.
Out of the three members of the appointment committee, only Ollila had experience in the technology industry, but even he, according to many, was not in touch with the service-driven internet-age mode of operation.
“Two of Nokia’s fiercest competitors, Apple and Google, obviously had boards more competent in global technology and internet knowhow than Nokia. To aggravate the situation, the Nokia Board of Directors was manned more with fine titles than substance. Scardino was the only American on the board despite the fact that the highest level of software competence was found in the US”
Excerpt From: Pekka Nykänen. “Operation Elop.” Apple Books.
The situation was worst for the company’s biggest money maker, its smartphone operating system Symbian. With over 6 million lines of code, the software platform had become unmanageable. Hardware design and Symbian software development were almost in a state war and were at each other’s neck daily.
Excerpt From: Pekka Nykänen. “Operation Elop.” Apple Books.
“For example, the normal trial-and-error software development technique was no longer used in Symbian software development. A person who was in charge of software development says that the problem was in the management which adjusted and fine-tuned projects ad nauseam. Even according to Nokia’s internal evaluation, the projects with the least management level involvement were the ones best on schedule. When the engineers were left alone to do their work, the results came forth.”
An employee working in the strategy department resorted to check the true status of upcoming phone projects from a friend working in development, because the official status given could not be trusted. Nokia was the emperor with new clothes, but nobody dared to say it out loud.
Excerpt From: Pekka Nykänen. “Operation Elop.” Apple Books.
“In just three months Nokia had made the decision that would seal its destiny. This decision were prepared by a man who had only worked for the company for five months — a CEO who had come from outside the industry.”
Excerpt From: Pekka Nykänen. “Operation Elop.” Apple Books.
“The N9 became an awkward pain point to Elop. Critics liked the phone but Nokia could not promote it because there was a fear that it would dilute the success of the Lumia phones. It looked like the success of the N9 came as a surprise to Elop. It would have been difficult to imagine how consumers would be interested in a device that was a dead end with a limited supply of applications. When Elop had been asked in London why anyone would buy the first and the last MeeGo phone, the man with a flu had responded: “I guess you just answered your own question.”
Excerpt From: Pekka Nykänen. “Operation Elop.” Apple Books.
Carolina Milanesi is an analyst who has been following Nokia for several years. She believes the crucial mistake at Nokia was to cling to Symbian for too long. The end result could have been different if the Symbian ramp-down had begun in already early 2010 and all development and marketing investment shifted to MeeGo.
“The credibility vanished. Developers were faced with a dilemma: Why build Symbian applications when the market fell from under the platform? Why build Windows Phone applications when there was no market?”
Excerpt From: Pekka Nykänen. “Operation Elop.” Apple Books.
Missing the Chinese New Year — the best shopping season of the year — was a pivotal mistake by Nokia in a situation where their market share on the Chinese smartphones market was already less than one percent.
The most significant markets for Nokia’s mobile phones were in India. Nokia made a critical mistake in bringing dual-SIM phones late to the market. According to Ramashish Ray, who was responsible for retail sales in India, Nokia was two years late: “Slow reaction to market reality, leadership bureaucracy and the diffusion of the decision making to too many forums”, Ray lists the reasons for the delay of the dual-SIM phones.
Excerpt From: Pekka Nykänen. “Operation Elop.” Apple Books.
Nokia’s phones were not killed off by a murderer from Canada. What killed them was the arrogance born in Nokia’s own country, concentrating on costs, unclear responsibilities, and bad decisions made by the company’s board.
Excerpt From: Pekka Nykänen. “Operation Elop.” Apple Books.
Turning The Flywheel
Unlike Operaatio Elop, Turning The Flywheel is a very short book. It is a summary of the Flywheel concept that Jim Collins discussed at length in his previous book: Good to Great. This concept essentially looks at a few select activities that a company must do, in relation to one another, so that the company can stay competitive. For instance, Amazon manages to sell goods at a lower price and in a big variety. That attracts consumers; which in turn attracts merchants to Amazon. Because of the bigger bargaining power, Amazon can lower the prices and expand its catalogue. The cycle keeps going on.
Each pillar in the Flywheel can constitute several critical capabilities of a company. I consider this concept as a useful practice for management to really think about what a company can do and should focus on. By no means does it mean that the Flywheel is an answer to everything. Businesses still need to pay attention to the external environment. We already saw with my review of Operaatio Elop above that Nokia, despite having resources and capabilities, still failed to adapt to the changing environment and collapsed. It’s the job of the management to constantly assess whether the current capabilities are still up to date and can help the company respond to the external challenges.
The book should serve as a launchpad and guide readers to more materials and references on business strategies and the Flywheel concept. If you’re new to it, it should be a helpful read.
WSJ ran a piece analyzing Amazon’s tactics in defeating businesses that were first partners, but became rivals standing in the way of Amazon’s private labels. It got me to think about when behavior from big and established companies became unlawful and unacceptable and when the behavior just stemmed from the drive to be more competitive. To me, there are three different aspects to this issue: the launch of competitive products or services against smaller businesses, the price undercut and the downright bullying. Let’s look at them one by one
Big techs’ launch of services and products against smaller businesses
Critics of big techs often accuse them of antitrust behavior when the companies launch a feature similar to what other smaller businesses offer. As these big tech firms usually own the customer relationship and hence important distribution, they have a clear advantage in promoting and selling the feature than smaller competitors do with their main products. To be clear, I am NOT against giants taking advantage of the data generated from their popular platforms for several reasons:
If a company wants to launch something new that is a response to a market threat and can potentially benefit the end users, why should it not be allowed to?
Yes, platforms like Amazon or Apple have a huge advantage at their disposal: data on consumer behavior. But how is that different from getting marketing intelligence from somewhere else? The difference here is that these platforms own the data, but first they have to WORK to build these platforms and maintain them
Retailers have their own private labels all the time. It’s hardly a surprise that they observe brands that rent spaces on their premises and subsequently launch their own labels
Copying others is what almost every business does to some degree
For these reasons, I don’t think the launch of services like Apple Music itself is an antitrust behavior by Apple. Clearly, the advantages over Spotify are 1/ the app is pre-loaded and 2/ Apple owns the operating systems and customer relationship. Plus, it’s not like consumers can’t download Spotify on Apple’s devices. There is a bit more friction involved compared to the effortless experience with Apple Music, but that’s the price you have to pay for when relying on others. I wrote about Slack’s lawsuit against Microsoft before. In that piece, I argued that Microsoft, in all their Microsoft365 offerings, has at least one option that doesn’t bundle Teams. Moreover, as in the case of Apple against Spotify, companies are free to add Slack to their stack besides Office365. Surely, Slack has a lot more convincing to do as it has to persuade companies that the additional expense each month is worth the extra utility from Slack compared to Teams. Nonetheless, that’s the nature of the competition and I do think Microsoft is within its rights to bundle Teams the way it does.
In this sense, if Amazon wants to introduce a private label in a certain category, based on their data, they are within their rights. Plus, consumers have one more option at their disposal. I personally don’t see a problem with that. If I were Jeff Bezos, I would do the same and you would be hard-pressed to say you’d do it differently.
Zappos, the online shoe marketplace, and its late CEO Tony Hsieh, successfully outmaneuvered Amazon and beat them into submission in the form of an acquisition that allowed Tony and his company a degree of autonomy from the parent company. In the book “The Innovation Stack“, the founder of Square talked about the pressure from Amazon in Square’s early days. Although much smaller than the Seattle-based company, Square managed to beat Amazon with their superior products and services. Why am I mentioning these examples? They serve as a reminder that small businesses can defeat much bigger resource-rich competitors.
From the WSJ piece:
In a June 2010 email chain that included Mr. Bezos, a senior executive laid out tactics, saying “We have already initiated a more aggressive ‘plan to win’ against diapers.com in the diaper/baby space,” a plan that included doubling Amazon’s discounts on diapers and baby wipes to 30% off, and a free Prime program for new moms.
When Amazon cut diaper prices by 30%, Quidsi executives were shocked and ran an analysis that determined Amazon was losing $7 for every box of diapers, former Quidsi board members said. Senior Quidsi executives were even more surprised when, the day of the price cuts, Jeff Blackburn, a top lieutenant to Mr. Bezos, approached a Quidsi board member saying the company should sell itself to Amazon, said a person familiar with the matter. At that point, Quidsi wasn’t for sale and had big growth plans.
Quidsi started to unravel after Amazon’s price cuts, said Leonard Lodish, a Quidsi board member at the time, missing its internal monthly projections for the first time since 2005. The company felt it had no choice but to sell itself because it couldn’t compete with what Amazon was doing and survive. Amazon bought Quidsi in 2010 for about $500 million. It shut down Diapers.com in 2017, saying it was unprofitable.
“What Amazon did was against the law. They were selling diapers for below cost,” said Mr. Lodish. “But what were we going to do? Sue Amazon for antitrust? It would take years and tens of millions of dollars and we’d be bankrupt by then.”
When it comes to predatory pricing, it’s a bit more complicated. First of all, to many consumers, a giant like Amazon bullying a smaller rival like Diapers.com looks very distasteful, but to the FTC, it may not necessarily be illegal. Here is what the FTC currently says about predatory pricing
Pricing below your competitors isn’t unique. What could get Amazon into legal trouble is whether it is establishing a monopoly in, as in this case, the diapers market and harming the consumers by raising the prices after eliminating competitors. Apparently, that hasn’t been the case. Last time I checked, there are more than one diaper brand on Amazon’s website and on the market in general. Plus, pricing is just one part of the value propositions a company can offer to consumers. Most car companies in the world will have a lower price than Ferrari, but the Italian company is still one of the most luxurious brands in the world and its customers still crave for its cars every year. It’s true that in some categories, prices are the dominant feature, but it’s NOT the only reason why consumers make the purchase decision.
Furthermore, one can argue that Apple Music, because it is owned by Apple, isn’t subject to the 15%/30% commission that 3rd-party app like Spotify is. Said another way, Spotify has to raise its prices to maintain its margin and as a result, make itself less competitive than Apple Music. That may be true, but once again, because there are alternatives to Apple Music on Apple devices such as YouTube, Amazon, SoundCloud and Spotify itself and because Apple Music isn’t the cheapest of all, in the eyes of the FTC, it is not illegal.
Where it gets unacceptable
Again, from the WSJ article:
At its height about a decade ago, Pirate Trading LLC was selling more than $3.5 million a year of its Ravelli-brand camera tripods—one of its bestselling products—on Amazon, said owner Dalen Thomas.
In 2011, Amazon began launching its own versions of six of Pirate Trading’s top-selling tripods under its AmazonBasics label, he said. Mr. Thomas ordered one of the Amazon tripods and found it had the same components and shared Pirate Trading’s design. For its AmazonBasics products, Amazon used the same manufacturer that Pirate Trading had used.
Amazon priced one of its clone tripods below what Mr. Thomas paid his manufacturer to have Pirate Trading’s version made, he said. He determined it would be cheaper to buy Amazon’s versions, repackage and resell them than to buy and sell them on the terms he had been getting; he decided not to do that.
Amazon suspended Pirate Trading camera tripod models that competed with the AmazonBasics versions repeatedly, Mr. Thomas said, alleging his tripods had authenticity issues. Amazon rarely suspended the tripod models that didn’t compete with AmazonBasics versions, he said. In 2015, Amazon fully suspended all Ravelli products, he said, and his company’s tripod business is now a fraction of the size it was. Mr. Thomas said he found being a seller on Amazon too risky and has largely pivoted to real-estate investing.
Several Amazon sellers said they have received notifications from Amazon, which has been battling fraud and fake goods on its platform, that say their products are used or counterfeit. Amazon suspends their selling accounts until they can prove that the products are legitimate, which can cause big sellers to lose tens of thousands of dollars each day, they said.
To turn their accounts back on, Amazon often requests that the sellers provide details on who manufactures their product along with invoices from the manufacturer so that Amazon can verify authenticity. Several sellers told the Journal they provided those details to Amazon to get their accounts reinstated, only for Amazon to introduce its own version of their products using the same manufacturer.
This is an example of under-handed and antitrust behavior that I think should be outlawed and punished. Here, Amazon used its authority and position to extract crucial information from other sellers and in turn, took advantage of the information to launch competing products. It’s one thing for Amazon to find out where sellers source their products on their own. It’s another for Amazon to leverage its position to do so. Worse, it disrupted Pirate Trading’s business repeatedly for unclear reasons and allegedly benefited its competing private label. This type of bullying behavior should be condemned and regulated.
In that sense, I don’t think it will be right for the likes of Apple to do the following to 3rd-party apps:
Make it hard for them to publish updates and features
Prevent them from being on the App Store without just cause
Extract proprietary information and use it against the 3rd-party apps
In short, it’s complicated and nuanced to determine whether a behavior from an established form should be punished and outlawed or whether it’s just the nature of business. My observation is that people usually jump into accusations and judgements too quickly, as well as collapse multiple issues into one. Regulations regarding antitrust in the future need to balance between letting companies, regardless of size, compete out of merits and making sure that bullying behavior is punished accordingly. That’s no small feat. That’s hard as you can by now imagine. But our society only advances when we make difficult accomplishments, doesn’t it?
Disclaimer: I own Apple, Microsoft, Spotify and Amazon stocks in my portfolio
In October, Apple announced a new feature in iOS14 called App Tracking Transparency (ATT). Essentially, this feature requires advertisers to seek user consent if they are looking to collect user data that helps with ads personalization and delivery. Although Apple delayed the introduction of ATT once already, starting next year, if apps want to be in the App Store, they will have to implement this feature. As the announcement came out, of course, those who make a living from ads aren’t happy. Facebook predicted that ATT would lead to a significant drop in its revenue while others threatened to sue Apple for anti-trust behavior.
This week, Facebook ran a PR campaign targeting Apple, saying that ATT would harm small businesses whose survival depends on running ads. Here are the ads:
Essentially, both are standing up for their customers. Apple is acting true to their corporate values and out of the interests of their end users. I don’t think any end users will be displeased with ATT. On the other hand, Facebook, whose main source of revenue is small businesses, is allegedly standing up for them. After Facebook ads were aired, Tim Cook, the CEO of Apple, tweeted this response
As you can see from Tim’s tweet, all ATT does is to force advertisers to seek users’ authorization to collect user data. It DOES NOT take away their ability to track. Plus, Facebook can customize the prompt message and convince users why it is in the user best interest to let Facebook collect their data. It is true that a prompt like that is pretty much similar to a NO, but at the end of the day, doesn’t it make sense to let users have a say in how their data is collected? Furthermore, Apple’s operating systems are its intellectual property. If Facebook wants to reach users on Apple’s devices and OSes, then Facebook has to comply with the rules that Apple sets. If the shoe were on the other foot, as in if a vendor was complaining about the rules Facebook sets on its platform, what would Zuck and his co. say then?
I saw some folks say that a move like ATT is Apple’s abusing its power and harming small businesses
With regard to the harm to small businesses, my perspective is that when the interests of the end users and advertisers/publishers collide, Apple rightfully takes the side of the former. Because the end users, not advertisers/publishers pay Apple for their products and services. I am sure that nobody can fault a company for catering to its own paying customers. To succeed in a world that is increasingly more conscious of privacy, the burden to succeed is on publishers and advertisers, not on Apple helping them. While I can see the difficulties that await those who are affected by ATT, as an end user, I appreciate what Apple is doing here. I mean, just look at this long list of data that Facebook collects from users and tell me if you think advertisers should get our data without our explicit consent
As to whether Apple is abusing its power, the answer is a bit more tricky. Apple is not dictating how the Internet works. Yes, it has one of the two largest mobile operating systems in the world and millions of devices, but there is also Android. What Apple does is just on its platform and how is that different from Target requiring all merchants to abide by its rules on its premises? Or any company exerting power on its platform?
However, Apple does have its own advertising business and it also uses some of the data generated by users to deliver ads. In its Advertising & Privacy section, Apple says that it doesn’t send user-specific data to advertisers. It tracks information such as device information (language preference, device, OS version, mobile carrier), device location (if enabled for the App Store, who doesn’t?) and segments which represent groups of people with similar characteristics. While it seems Apple doesn’t track users individually per se, the default option on iOS14.3, which I am on now, is that you give the company consent to collect some of your data, as mentioned above, and deliver personalized ads to you. While it’s much less grotesque than what FB does, I can see why some people accuse Apple of hypocrisy.
81% of iPhones launched in the last 4 years are on iOS14
According to 9to5Mac, here is what Apple told developers on the adoption of iOS14 and iOS13
It’s worth noting that iOS13 and iOS14 are only compatible with iPhone 6S and models that come after it. iOS 13 was launched on 9/19/2019, almost at the same time as iPhone 11. Based on these pieces of information, what we can be sure is that 10% of iPhone installed base worldwide are iPhone 6/6S or older. If there are around 1 billion iPhones in circulation, it means that Apple can look at 100 million phones that are primed for an update, whether it’s a brand new iPhone12 or a refurbished older model.
If we take the period between September 2016 and now as the four-year span that Apple referred to, what we can be sure, based on the compatibility and the launch of iOS, is that at least 2% of the phones introduced in the last 4 years were made up of iPhone 7, 7+, 8, 8+, X, XS and XR.
Even though people hold on to their phones longer, the adoption of iOS14 indicates an increasing engagement with Apple’s latest iOS; which is a good sign if you want to increase Services revenue and keep customers loyal. Almost a year ago on 01/27/2020, Apple revealed the similar figures for iOS13 and they were lower than what was just announced this week
Disclaimer: I hold Facebook and Apple stocks in my personal portfolio.
On its 2020 Investor Day, Disney showed everybody that it was going to be a force to be seriously reckoned with in the streaming business in the years to come. The four hour presentation was packed with announcements on upcoming titles, business updates and impressive revised projections. Netflix fans always point to the fact that the streamer won the streaming war by having a much bigger subscriber base than any other competitors. The big subscriber base allows Netflix to operate at a much lower cost advantage. For the same investment of $1 billion in content, a base of 100 million subscribers will lead to a cost of $10 per subscriber while a base of 10 million will result in a cost of $100/user. As each user brings in monthly revenue, a lower cost structure enables a higher profitability which, in turn, enables more money in content creation which, in turn, leads to more appeal to consumers.
Netflix, with 195 million subscribers, enjoys a cost advantage to other competitors. It already got over the peak operating losses and has seen positive free cash flow for the past three quarters, despite spending a massive amount of money on content. I believe none of the other streamers achieved that feat yet. In short, Netflix has an invaluable head start.
Enter Disney Plus. Last year, Disney forecast to have around 60 to 90 million subscribers by the end of FY 2024. They just announced that the number of Disney+ subscribers was 86.8 million as of December 2, 2020. Critics say that Disney reached this number due to a huge subsidy in the Indian market which constitutes 30% of the base now. Well, that’s true, but it’s hard to reach the mass market in a short period of time and keep the price high. You have to take a multi-step approach. Expand the base first, add more value and increase the price.
That’s what Disney is doing now. With more than 86 million subscribers in the pocket, the company is planning 100+ titles per year for the next few years, coming from established brands such as Marvel, Disney, Pixar, Star Wars and National Geographic. At the same time, Disney is addressing the Average Revenue Per User (ARPU) issue with a price hike of $1/subscriber/month in the US and €2/subscriber/month in EU starting March 2021 and with a Premier Access model. The Premier Access model lets subscribers gain first access to select titles before everyone else for an additional fee. A few months ago, Mulan cost Disney+ subscribers an additional fee of $30 in exchange for first exclusive access.
As a result, Disney expects to have around 230-260 million Disney+ subscribers by the end of FY2024. Within one year, they revised the forecast from 60-90 to 230-260 million subscribers for the same time frame. There must have been some sandbagging, but I believe that even the folks at Disney didn’t expect to have such a big leap. The new figure should put Disney+ in the same conversation as Netflix by the end of FY2024 and well ahead of the other streamers. The profitability expectation remains at the end of FY2024, unchanged from the Investor Day last year, even though the legendary company expects to at least double its content cost by FY2024. The same upgrade in expectation is similar for ESPN+ and Hulu
Those are impressive revisions, particularly given Disney’s distinct advantages. First, streaming services aren’t the only way they generate revenue and profits. Their Media and Parks segments generate considerable revenue and profit as well, especially Parks. Parks has been hit particularly hard by the pandemic, but once we go back to normal and vaccine is delivered to the public, Disney should have no problem attracting guests back to their hotels, parks and resorts. Even though the other segments don’t directly subsidize the streaming services, having them around definitely helps the company as a whole in terms of profits, revenue and cash flow. Netflix, rightfully worth every accolade for their laser focus, has only one line of business. As long as that line of business thrives, they will enjoy the full benefits of not having to spread resources like Disney. However, on the other hand, a crisis would hit them harder than Disney without any cushion.
Moreover, Disney has so many ways to appeal to consumers. First, they have an extraordinary library of content and brands, ranging from series, films, documentaries and sports. Second, they can always create value out of a bundle such as what they are doing now with a bundle of Disney+, Hulu (ads and no ads) and ESPN+. Another model that can be deployed is Premier Access as I describe above or a theatrical release in which a movie will be available first in theaters and then on Disney+. An example is Black Widow. This takes me to another strength that Disney has. A portfolio of household brands that need no introduction. When somebody mentions Avengers characters or Star Wars, there is little introduction needed. That kind of brand power helps draw viewers regardless of the medium. When Disney releases Black Widow in theaters first, they likely won’t need to persuade Marvel fans to pay to watch. What they may need to persuade them on is whether it’s worth getting into theaters when the pandemic may still be around. This brand power isn’t just limited to consumers with kids. On the 2020 Investor Day, Disney CFO revealed that more families without kids are subscribers than families with kids; which is a very interesting revelation since it was assumed that Disney would appeal parents through content for kids.
In short, I believe the future is bright for Disney’s streamers and the company as a whole. That doesn’t mean that I think Netflix is doomed. The sizeof the market and the consumer behavior should allow these two behemoths to co-exist. As long as other streamers have the financial ammunition to compete, they should have a seat at the table, but this should be a two-race non-zero-sum market. The winners should be consumers who will get more choices and talents, including actors, directors, creators, storytellers and so on, who will be sought after as streamers strive to create quality content.
Adobe’s extraordinary story continues
Adobe may not be as popular as some of its products. It’s the creator of Photoshop, Illustrator, InDesign and PDF. It also owns Behance, the LinkedIn of creative folks. Its less known products include Marketing Solutions, such as Email Marketing, eCommerce and Customer Analytics, and Document Solutions such as eSignatures or Document Intelligence Services. Besides its famous products, Adobe is also known for being the trailblazer in transitioning to a Software-as-a-Service model. The transformation started in about 2011 or 2012, and it has been the case study as well as the envy of established software makers all over. Adobe’s revenue grew at a CAGR of 18% from 2013 to 2020, reaching almost $13 billion in 2020. More impressively, its FY 2020 Operating Income was even higher than its revenue in FY 2014. Additionally, its Operating Margin in FY 2020 was 32%, the highest in the last 6 years.
The transformation was best reflected in Adobe’s subscription. In 2013, only 28% of the company’s top line came from subscriptions which have higher margin and stickiness. In FY 2020, the figure stood at 90%. In terms of CAGR of subscriptions’ absolute dollars, it is an extraordinary 39%.
Among the main business segments, Digital Media is the biggest and certainly the driver of growth at Adobe. Since 2013, Digital Media’s revenue grew by almost 300%. Within Digital Media, Creative and Document Cloud Annual Recurring Revenue more or less doubled in the last 4 years.
While Digital Experience, which includes B2B solutions, faces stiff competition from the likes of Salesforce, Adobe is clearly the market leader with their Digital Media offerings. How many designers or creators in the world don’t have an Adobe product? Which document format can replace the de factor PDF when it comes to official documents? Their Digital Media products, whether it’s Creative Cloud or Document Cloud, are popular among subscribers. According to Adobe’s 2020 Investor Day
75% individual subscribers in 2020 were completely new to Creative Cloud
Individual subscribers made up more than half of the Creative Cloud’s revenue
2 billion mobile + desktop devices were installed with Acrobat Reader
75%+ individual subscribers in 2020 were new to Acrobat
Mobile IDs were more than 300 million in total as of Q4 FY 2020, with more than 175 million created
More than 60% of Creative Cloud ARR is based on All Apps subscribers. An All-App subscription costs $53/month, much more expensive than individual app subscriptions.
All these data points show how much customers love Adobe products. As more and more people use Adobe products, it helps the company establish an invaluable network effect. If you are a designer collaborating with other designers and businesses that are used to working with Illustrator and Photoshop, it’s difficult not to use those applications. That’s perhaps the strongest moat Adobe has. There may be better alternatives than their products on the market, but those products don’t have the brand names, the popularity, the established sales channel and the network effect that Adobe has. Once a company can establish this kind of relationship and network effect, its priority should be to continue add values to subscriptions to keep the churn low. In other words, as long as the existing subscriber base doesn’t shrink, Adobe’s revenue will only grow. Any new subscribers acquired will only add to their fortune.
Disclaimer: I own both Disney and Adobe in my personal portfolio.
Writing that 2020 is good for somebody or a company is weird as this year has been nothing, but a disaster. However, from a business perspective, Target has had a pretty good 2020 so far.
Before 2020, its comparable sales growth was often a low or middle single digit. In Q4 2019, its physical store comparable sale growth was even in the negative territory. 2020 flipped the switch. The company’s total comparable sale growth has been in the double digits with Q2 2020 recording the highest at 24%. Digital comparable sales growth is at least 9% or higher. Q3 saw a bit of a decline compared to Q2, but the overall growth was still higher than 20%. I find it interesting that the revenue YoY growth and the store comparable growth seem pretty in sync with each other, but that’s because physical stores make up at least 84% of Target’s revenue. Digital sales was responsible for almost 16% of the overall revenue in Q3 2020, an equivalent of $3.6+ billion in revenue for a quarter and up from 7.5% in the same quarter last year.
In terms of profitability, Q2 and Q3 of 2020 saw the highest gross margin and operating margin in the last 5 years. Operating margin reached 10% and 8.5% in Q2 and Q3 respectively while gross margin was 30.9% and 30.6% in Q2 and Q3. During a year dominated by a once-in-a-lifetime pandemic, Target managed to pivot its business to adapt to the dire situation and improved not only its top line, but also its profitability. That’s proof of resilience and managerial competence.
Another aspect of their business that I find interesting is their branded cards’ penetration. Target measured its credit and debit card’s penetration as percentage of sales that took place on their cards. In other words, if there is about $200 million in sales in a week and $50 million of which is paid through Target’s credit and debit cards, the penetration rate is 25%. And shoppers have a reason to use those cards. Owners of these cards have exclusive benefits that other issuers can hardly match, such as: no annual fee, 5% off on purchases at Target stores and on its website, free 2-day shipping on select items and longer return period. Yet, there has been a slowly steady decline in terms of the RedCard penetration. The penetration rate in Q3 2020 was 21%, down from 23% from the year before. Given the increase in sales and the unique offerings of the RedCards, it’s surprising that the figure not only didn’t grow, but it also contracted. This indicates to me that Target can do much better in getting customers to apply for a RedCard. It is a good retention tool and it brings extra revenue to the company. In Q3 2020, credit card profit sharing was $166 million, but down from $177 in the same period last year.
In short, Target has been doing quite well. They succeeded in growing their online business which has been turbocharged by the pandemic, but that, in no way, means that the company didn’t put in the effort. Think about it this way, every retailer tried to grow its online business, but Target managed to do in a cut-throat industry and at their scale. So credit to them. Plus, they made appropriate and necessary investments in same-day services and deliver. In the last two earning calls, the management reported ridiculous numbers of same-day services’ growth, to the tune of several hundred percentages. Shoppers like options. With Target, they can now order online and have it delivered to their door, or drive up to the parking lot to pick the order up or fetch it in stores. The flexibility is there and it will bode well for Target in the upcoming holiday season that is unfortunately engulfed, still, by the pandemic.
Regarding the possibility of Target having a similar subscription to Walmart+ or Amazon Prime, I think Target is still missing the main hook, the main attraction. Amazon Prime has been around for more than 10 years. Over the years, Amazon kept adding more and more benefits for shoppers so that the subscription now offers a plethora of benefits ranging from unlimited 2-day shipping regardless of order size, movies, music, books, exclusive deals and so on. On Walmart Plus side, Walmart can offer affordable groceries and discount on fuel. Target doesn’t seem to me that it can match any of those benefits. Even though some pieces are there such as Target’s popularity, its network of stores across the country and its delivery flexibility, I don’t see a main selling point for a Target’s own subscription yet. We’ll see.
Salesforce reportedly in talks to buy Slack
Yesterday, after the news broke that Salesforce has been in talks to acquire Slack and a deal can happen next week, Slack’s stock price popped by more than 30% within a day. The reaction that I saw on Twitter was mostly positive for both parties. I can see why. But the fact that investors are happy about this prospect of an acquisition says something about Slack as a standalone business. Slack last reported its active daily user at 12 million back in October 2019. Within the past 12 months, Microsoft revealed the metric at least 3 times: 20 million in Q2 FY 2020, 75 million in Q3 FY 2020 and 115 million last month for Q1 FY 2021. There are two reasons why companies don’t make disclosures: 1/ they are legally obligated not to and 2/ there is nothing rosy to disclose. In this case, it’s squarely the latter case. My guess is that Slack hasn’t seen a meaningful increase in its Daily Active Users (DAU) numbers DESPITE a pandemic that turbocharged working from home, the same way that Microsoft Teams has achieved. In the face of a formidable challenge from Microsoft, Slack initially played it cool. Below was their reaction 6 months ago
“What we’ve seen over the past couple of months is that Teams is not a competitor to Slack,” Butterfield told CNBC in an interview after Microsoft’s Q3 earnings update. Butterfield also downplayed the impact on Slack’s growth caused by Microsoft “bundling [Teams] and giving it away for free” with Office 365 over the past three years.
Yet, Slack filed a formal complaint to the EU about Microsoft’s alleged anti-competition practice, the same practice that Butterfield downplayed. I wrote here about why that formal complaint is unlikely to succeed. But it shows Slack’s desperation. If Microsoft weren’t a competitor and its bundling practice was nothing, why would Slack sue to stop it? All of these factors and the fact that investors were happy about the prospect of being acquired by Salesforce paint a solemn picture of Slack as a standalone company. If it joins Salesforce, there will likely be a Salesforce bundle that includes Slack, the same way that Microsoft bundles Teams into Office 365. Slack would get more assistance in selling to corporate clients while Salesforce would get extra capabilities quickly without having to build them from scratch.
Uber vs Lyft
The pandemic has been a catastrophe for ride-hailing companies such as Lyft and Uber. According to Second Measure, the market in the US dropped to only half of the 2016 level and only recovered to the 2016 level in October 2020. That’s how big the impact of the pandemic has been on this business. Since Uber and Lyft are always compared to each other, you’d think that their business is faring similarly. Not really.
While Lyft essentially has only one business in ride-sharing, Uber successfully grew its food delivery service UberEats to be a $4.5 run rate business, making up 40% of Uber’s revenue in Q3 2020. Uber Eats’ $1.1 billion in revenue in Q3 2020 was more than double Lyft’s entire revenue in the same period. Additionally, the pandemic affects each other differently. Lyft’s main market is the US, which is, unfortunately, going deeper and deeper into the pandemic. There is no sign of things turned around here in the US, unless there is a vaccine. It severely handicaps Lyft’s business and Uber’s ride-sharing segment. Nonetheless, Covid-19 has been a boon to Uber Eats. It has grown substantially in the past few months and become a silver lining for Uber. Plus, Uber announced its effort to deliver groceries and its acquisition of Postmates indicates that it is serious about becoming a delivery-as-a-service business. In other words, while the two companies are often mentioned in comparison, they are vastly different now, with Uber becoming more of a diversified company. It is more diversified horizontally (more services) and vertically (if you consider being present in more countries). In this environment, I think that the Uber model is a much better one. Don’t take my word for it. Look at the stock prices. The two companies made debut on the stock market almost at the same time. While Uber soared past its IPO price, Lyft is trading nowhere close to its own IPO price.
It’ll be interesting to see how the next couple of years will be for these two companies. Would Lyft venture into another business like Uber did? What would a vaccine bringing back our previous life mean for Uber? Knowing that it would power up the ride-sharing business, but adversely affect the growth of Uber Eats?
Costs and benefits of a credit card from an issuer perspective
Issuing a credit card is a business and hence, it comes with risks, expenses, revenue and hopefully profits. A credit card issuer’s revenue comes from three main sources: interchange, fees and finance charge. Finance charge is essentially interest income or the interest on outstanding balance that users have unpaid at the end of a cycle. Fees include late fees, cash advance fees or annual fees, just to name a few. Interchange is what an issuer receives from merchants on a transaction basis, according to a rate agreed in advance and usually dictated by networks such as Visa or Mastercard. There are a lot of factors that go into determining what an interchange rate should be, but for a consumer card, it should not be higher than 3% of a transaction’s value.
As an issuer thinks about which credit card product to issue, it needs to balance between the benefits of the card, the expenses and the profitability. For instance, nobody would be paying $100 in annual fee for a credit card that has a standard 1.5% cash back without any other special benefits. That product wouldn’t sell. Likewise, an issuer would flush money down the toilet if it issued a card with a lot of benefits such as a Chase Sapphire without a mechanism to make money on the other side, like an annual fee. The art of issuing a credit card is to make sure that there is something to hook the users with and a way to make money.
The dynamic between a brand and an issuer in a Cobranded credit card agreement
In addition to having cash back or rewards on generic categories such as Dining, Grocery or Gas, an issuer can appeal to a specific user segment by having a special benefit dedicated to a brand. That’s why you see a Co-branded credit card from Walmart, Southwest, Costco or Scheels. These brands work with an issuer to slap their brand on a credit card. What do the parties in this type of partnership get in return?
From the Brand perspective, it offers to an issuer Marketing Assistance and an exclusive feature to appeal to credit card users. To the fans of Costco, a Costco credit card with 5% cash back; which should be very unique, is an enticing product to consider. Why saying no to extra money when you already shop there every week without it already? Moreover, a Brand can also be responsible for rewards at or outside their properties. For instance, Costco can pay for rewards at Costco stores or on Costco website or purchase outside Costco or the combination of all. It varies from one agreement to another.
From the Issuer perspective, it has to compensate the Brand in the form of Finder Fee, which is a small fee whenever there is a new acquired account or a renewal, and a percentage of purchase volume; which you can consider it a tax. The issuer, of course, has to take care of all the operations related to a credit card such as issuing, marketing, customer service, security, regulatory compliance, fraud, you name it. In return, issuers have an exclusive benefit to appeal to credit card prospects. They will also receive all the revenue, net the compensation to the Brand, as I described in the first section. Therefore, the longer a customer stays with an issuer and the more he or she uses the card, preferably revolves as well, the more profitable it is for the issuer.
What to offer
– Marketing Assistance & brand appeal – Rewards
– Finder fee (a fixed fee for every new account and/or a lower fee for every renewal – In some cases, issuers fund rewards as well – All operational needs related to a credit card – A percentage of purchase volume
What to gain
– Finder fees – A tactic to increase customer loyalty – A percentage of purchase volume from the issuer
– An exclusive feature to appeal to credit card users – Revenue, net all the compensation to the Brand
Typical credit cards
Based on my observations, there are three main credit card types on the market which I assign names for easier reference further in this article:
The Ordinary: cards that have no annual fees, but modest benefits such as 1% or 1.5% cash back on everything. These cards are usually unbranded
The Branded: these cards are Co-Branded credit cards that are issued by a bank, but carry a brand of a company. These cards can come with or without an annual fee, but they reward most generously for purchase at the company’s properties, such as 3-5x on every purchase. Then, there is another reward scheme for a generic category such as 2-3x on dining/gas/grocery/travel. Finally, there is a 1x on everything else
The Premier: these cards are often accompanied by a high annual fee. To make it worthwhile for users, the issuers of these Cards hand out generous benefits and/or signing bonus. For instance, a Chase Sapphire user can get 60,000 points after spending $4,000 the first 90 days.
All the three types usually work well with mobile wallets and have a delay on when rewards are posted (usually it takes a cycle). This delay isn’t particularly enticing to users because when it comes to benefits, who would want to wait?
Apple Card is a credit card issued by Goldman Sachs and marketed by Apple. The card has no fees whatsoever, but comes with some special features:
An expedited application process right from the Wallet app on iPhones
Instant cash back in Apple Cash – no delay
Native integration with Apple Pay
3% cash back on all Apple purchases
12-month 0% interest payment plan for select Apple products
2% on non-Apple purchases through Apple Pay
1% on non-Apple physical transactions through a chip reader or a swipe
Without the 2% cash back with Apply Pay, Apple Card would very much be for Apple purchases only. But because there is such a feature and Apple Pay is increasingly popular, I think Apple Card should be something that issuers need to beware. Let me explain why
With the increasing popularity of Apple Pay, Apple Card should not be taken light
Last month, the Department of Justice filed an anti-trust lawsuit against Google. Interestingly, the lawsuit said that 60% of mobile devices in the US were iPhones. That says much about how popular Apple’s flagship product is. With the easy application process and the native integration into iPhone and Apple Pay, Apple Card has a direct line to consumers. Once a consumer contemplates buying an Apple product, it’s impossible not to think about getting an Apple Card and reaping all the benefits that come with it. With the existing iPhone users, the extensive media coverage and the marketing prowess of Apple will surely make them aware of Apple Card. Therefore, other issuers are on a back foot when it comes to acquiring customers from iPhone user base. However, most people have multiple cards, so one can argue that this advantage may not mean much. To that, I’ll say: fair enough. Let’s look at other aspects.
If you compare Apple Card to the Ordinary above, Apple Card clearly has an advantage. In addition to the 3% cash back on Apple purchases, there is also 2% cash back on other purchases through Apple Pay, higher than the 1.5% offered by the Ordinary. Granted, Apple Pay’s presence is a requirement, but as more and more merchants and websites use Apple Pay, it’s no longer relevant. It almost becomes a given and this advantage Apple Card has becomes more permanent. Besides, Apple Card has no fees and can issue cash back immediately after transactions are approved, compared to a host of fees and a delay in rewards from the Ordinary.
Between Apple Card and the Branded, it’s harder to tell which has the advantage. It depends on the use cases. For on-partner purchase (purchase on the brand’s properties), Apple Card has no chance here as the reward rate from the Branded is much higher: 3-5x compared to 2x from Apple Card. However, things get trickier when it comes to non on-partner purchase. If a non-on-partner purchase warrants only 1x reward from the Branded, Apple Card has an advantage here as it can offer 2x rewards with Apple Pay. If a non-on-partner purchase warrants 2x reward from the Branded, the question of which card consumers should favor more rests on these factors:
How much do consumers care about receiving immediate cash back?
Can the transaction in question be paid via Apple Pay?
How much are consumers willing to go back and forth in their Apple Pay’s setting?
Between Apple Card and the Premier, the comparison depends on which time frame to look at. Within the first year on book, the Premier should have an advantage. No one should pay $95 for a card and does not have a purchase plan in mind to get the coveted signing bonus. In other words, savvy users should plan a big purchase within the first 90 days to receive thousands of points. In this particular use case, the Premier clearly is the better card. However, it gets trickier after the first year on book. Without a signing bonus, users now have to determine whether it’s worth paying an annual fee any more. The usual benefits from the Premier should be better than Apple Card’s, but the high annual fee and the delay in rewards may tip the cost-benefit analysis scale to a tie or a bit in favor of Apple Card.
Given my arguments above, you can see how Apple Card, provided that Apple Pay becomes mainstream, can become a formidable competitor to issuers. Apple Card may not affect the acquisition much, but it may very well affect the purchase volume and usage of other issuers’ cards, and by extension, profitability because, as I mentioned above, issuers’ revenue come partly from interchange. In other words, Apple Card should not be taken lightly as a gimmick or a toy feature at all.
According to a research by Pulse, in the US in 2019, there was around $1.3 billion worth of debit transactions through mobile wallet, $1.1 billion of which came through Apple Pay. This level of popularity will leave retailers and merchants with no choice, but to have Apple Pay-enabled readers; which in turn will gradually benefit Apple Card.
Disclaimer: I own Apple stocks in my personal portfolio
AirBnb recently filed its S-1 as an important step before soon going public. Finally, the curtain on one of the household names and one of the most anticipated IPOs is now pulled back a little. The filing is pretty long. I stuck through it, well most of it. Here is what I found
Unless you have lived under a rock for the past 4-5 years, you should be familiar with AirBnb. It’s that website where you can book a spare room, an air mattress in somebody’s house or the entire house for a period of time. In 2007, two of the founders were trying to make more money to cover the expensive living cost in San Francisco. One time, there was a popular conference in town and all the hotels were booked. So they quickly came up with a website that could let people book for an air mattress at their place. The seed for AirBnb was planted on that day. 13 years later, they are on the verge of going public.
The problems AirBnb solves are two fold. 1/ They increase the efficiency of the travel market. Hosts, whether it’s an individual or a professional management company, have spare resources (rooms) that can be exploited while guests can have an alternative choice in addition to traditional hotels, often at a cheaper price. 2/ Trust. Guests come to stay at traditional hotels because they somewhat trust the safety there. Imagine that you are an individual host. How could you trust a stranger enough to let him or her in your apartment, let alone sleeping a few feet away from you? At its core, AirBnb operates as a middle man between hosts and guests, and facilitates the searching and booking of travel products.
Who does AirBnb compete with? Here is the list of competitors AirBnb detailed in the filing
Online travel agencies (“OTAs”), such as Booking Holdings (including the brands Booking.com, KAYAK, Priceline.com, and Agoda.com); Expedia Group (including the brands Expedia, Vrbo, HomeAway, Hotels.com, Orbitz, and Travelocity); Trip.com Group (including the brands Ctrip.com, Trip.com, Qunar, Tongcheng-eLong, and SkyScanner); Meituan Dianping; Fliggy (a subsidiary of Alibaba) Despegar; MakeMyTrip; and other regional OTAs
Internet search engines, such as Google, including its travel search products; Baidu; and other regional search engines;
Listing and meta search websites, such as TripAdvisor, Trivago, Mafengwo, AllTheRooms.com, and Craigslist
Hotel chains, such as Marriott, Hilton, Accor, Wyndham, InterContinental, OYO, and Huazhu, as well as boutique hotel chains and independent hotels
Chinese short-term rental competitors, such as Tujia, Meituan B&B, and Xiaozhu; and
Online platforms offering experiences, such as Viator, GetYourGuide, Klook, Traveloka, and KKDay.
The order of this list should tell you which AirBnb considers their fiercest rivals. Not only do those incumbent OTAs offer a marketplace for room nights at traditional hotels, but they also have their own homestay marketplace offerings, similar to what AirBnb is. With an esteemed competition like this, how well has AirBnb performed in the past few years?
Incredible growth in the past 5 years
According to the filing, the number of Nights and Experiences (like a virtual cooking session or a tour to a sight nearby) booked grew at a CAGR of 46% from 72 millions in 2015 to 327 millions in 2019. Meanwhile, the gross booking value (the dollar amount of all Nights and Experiences booked) grew 47% every year from around $8 billion in 2015 to $38 billion in 2019. Those are impressive numbers. Put it this way, in the first 9 months of 2020, 6 of which were amid Covid-19, AirBnb booked more Nights and Experiences and dollars than they did in the entire year of 2016. On this note, I wish AirBnb were a bit more transparent. I’d love to see a breakdown of booked room nights and booked Experiences. Booking.com breaks down their bookings for accommodation, flights and car rentals. I don’t see any reason why AirBnb shouldn’t do the same to help investors understand more the dynamics of their business.
Before the pandemic, AirBnb’s revenue grew 51% every year, from $919 million in 2015 to $4.8 billion in 2019. The first 9 months of 2020, despite the deadly Covid-19, saw the company book almost as much revenue as the entire year of 2017. If we look at the take-rate which is the ratio between revenue and gross bookings, it has been flat at around 11-12% every year between 2015 and 2019. The commission in the first 9 months of 2020 is 14%. Given that AirBnb pushed for virtual Experiences during the pandemic and saw their rental bookings demolished, that’s why I argue for more transparency in the way AirBnb reports their numbers. To really understand the dynamics of their business. Even at 14%, it’s still a bit lower than what Booking.com has globally on average at 15%.
Covid presents a massive challenge and a silver lining
Covid-19 is perhaps the biggest and most damaging crisis to the travel industry. AirBnb isn’t immune to it. Bookings (Nights and Experiences Booked) were up 25% and 17% year-over-year in January and February 2020, before the bottom fell off under AirBnb’s feet. Covid-19 hit. Bookings dropped by 114% and 103% in March and April, respectively. The situation recovered as folks travelled more after April, but as of September 2020, bookings were still down 28%. The decline in bookings leads to a drop in revenue in the first 9 months of 2020 of 32% YoY. Operating loss is almost 4 times bigger than the loss of the same period last year. The damage was so devastating that the company even considered not going public this year.
But why do I say that Covid-19 presents a silver lining?
Before Covid-19, AirBnb showed signs of inefficiency. After being profitable in 2018, every cost item as % of revenue increased in 2019, in comparison to 2018, resulting in the company’s operating loss of 10% of revenue. Even though it still suffers loss in 2020 due to a rise in costs, the cost mix is different. What AirBnb expensed in 2020 is mostly related to Covid-19. The growth in G&A, Operations and Product Development is offset by the decline in Marketing expense. Specifically, the company didn’t spend as much money on marketing, particular online ads as it did a year ago. In fact, for the nine months ending on September 30, 2020, only 9% of their traffic came from paid marketing channels. In an interview a few months ago, CEO Brian Chesky revealed that the company had the same booking in the US market in 2020 up to that time as they did in the same period in 2019, despite NO spending on paid marketing, to the tune of a saving of $1 billion.
Despite all the damages Covid-19 has caused the company, the pandemic looks to be an opportunity for AirBnb to recalibrate and refocus. They might have got carried away with expanding too fast without a tight control of the expenses. At least, they now learned that they could still keep the business in a good shape without wasting money on paid marketing. Whether they can apply the same lesson to other expense items remains to be seen, especially when Covid-19 is still engulfing us around the globe.
Moving forward, I hope that AirBnb will be more transparent with regard to the breakdown of their online and offline marketing expenses. Booking.com did a very good job on that. They have a specific section dedicated to online marketing spending while AirBnb mixes it with brand marketing; which doesn’t let investors and analysts have a true feel of how much the company spends on paid performance marketing, in comparison to its rivals.
Like many other companies, AirBnb has a couple of looming legal threats on the horizon. One significant threat comes from possible restricting local regulations. In their filing, AirBnb wrote:
For example, listings in New York City generated approximately 2% of our revenue in 2019, and when new regulations requiring us to share host data with the city are implemented, our revenue from listings there may be substantially reduced due to the departure from our platform of hosts who do not wish to share their data with the city and related cancellations. A reduction in supply and cancellations could make our platform less attractive to guests, and any reduction in the number of guests could further reduce the number of hosts on our platform.
To be honest, I never understand the beef between local authorities and AirBnb. If it’s about tax, then just raise taxes on the company, but I don’t fully support passing regulations that restrict its business and by extension, individual hosts that operate on its platform. Nonetheless, it’s the reality that AirBnb has to deal with. There are a host of legal issues in various forms that AirBnb is encountering. Even though they don’t necessarily threat its existence, it may harm the top and bottom lines.
The second threat comes in the form of a $1.35 billion tax bill. According to AirBnb, they were served in September 2020 with a notice that they would need to pay $1.35 billion in taxes, plus penalties and interest related to their alleged failure to pay enough of their dues in 2013. That figure can amount to 30-33% of total revenue in 2019; which is a significant sum.
My thoughts on AirBnb
AirBnb is a spectacular story in a sense that it opened up a market that had been there before. Before AirBnb, no company had been able to take homestay rentals to the level that it did. Would there have been another company that achieved the same feat? Possible, but the fact and the matter is that it is AirBnb that revolutionized this market and has grown to be a multi-billion dollar company. It warrants nothing but praise and admiration. However, from a financial perspective, the last 18 months haven’t been great. Even before Covid, AirBnb registered a loss while they should have made some profit.
At its core, AirBnb is similar to other OTAs. The difference is that while the incumbent OTAs, the likes of Booking.com and Expedia, rule the world of traditional hotels, AirBnb dominates the homestay world. Yes, the incumbents have their homestay offerings too, but is Vrbo a verb or as popular a noun as AirBnb? Not even close. While the OTA giants are making inroads into AirBnb’s territory, AirBnb also starts to have some hotels listed on their platform. I think in the future AirBnb and OTA giants can co-exist together and thrive in their respective stronghold. AirBnB understands how to manage homestay, but doesn’t have the expertise to deal with hotels, especially chains like Booking.com. On the other hand, OTAs don’t have the brand name in the homestay world like AirBnb nor the expertise.
In the near future, here is what I think will be AirBnb immediate priorities for the next one or two years
Recover to the pre-covid level of business. Even after travel is opened up again, it won’t be the same as it was for a while. Would travelers be comfortable in a stranger’s house without knowing if it’s clean enough? How about traveling internationally to somewhere that still struggles with Covid? Would business travel recover fast enough?
Deal with the legal challenges as I mentioned above
Get used to the scrutiny that comes with being public
Keep control of the costs. 2019 wasn’t a great example of cost management. Would AirBnb keep up the lesson it learned during Covid?
What’s next for Virtual Experiences?
In short, once travel industry recovers, however much, from this deadly pandemic, AirBnb will no doubt increase its bookings and revenue. I do have some confidence in their adapting to the new style of travel. What they will be more judged on is their profitability and that remains to be seen. 2019 wasn’t great. 2020 so far has been a year of exception because of Covid-19. Their performance on the stock market will be much affected by whether they can stay disciplined with their expenses.
I do want to make a point about my personal experience with AirBnb. The site is helpful, but it is annoying. What bugs me is that AirBnb isn’t upfront with all the fees. Once you settle on a listing for $100/night, by the time you get to the checkout page, it will be already $150/night with service and cleaning fees. It feels like you were duped, cheated or fooled. I’d much rather know all the fees up front, from the very beginning. I do believe that my experience isn’t unique. Many others share the same view on this issue. Hence, I hope AirBnb will fix it soon.
Interesting facts about AirBnb
Besides the main points above, there are a few other statistics that I think are pretty interesting.
As of September 2020, AirBnb had 4 million hosts over the world, 55% of who are women and 86% are outside of the US
In 2019, 23% of new added hosts were guests first. 50% received a booking within 4 days of becoming available and 75% within 16 days
During 2019, 69% of revenue came from repeat guests
AirBnb’s debt as of September 2020 stood around $2 billion
AirBnb committed to $1.2 billion for a single cloud vendor (AWS, I think) through 2024
Twelve months ended September 30, 2020, the average annual earning per host with at least one check-in was $7,900.
As of September 30, 2020, 21% of all hosts were Superhosts
In 2019, 68% of guests left reviews
Chargebacks in the year ended December 31, 2019 and nine months ended September 30, 2020 were $92 and $95 million respectively
By my calculation and data provided by AirBnb, their average merchant fee rate was 1.85% in 2019 and 2% in the nine months ended September 30, 2020
Nights and Experiences booked in the Top 20 cities made up less than 5% of the total every month
Nights and Experiences booked for 28 nights or longer made up between 3.5% and 6% of the total every month
As of December 31, 2019, 90% of all hosts were individual and 72% of bookings were with individual hosts. “Of the reviews they received in 2019, 83% of ratings for individual hosts and 75% of ratings for professional hosts were 5-star.”
“In 2019, the average number of guests on an Airbnb stay was 3 people, and 77% of nights were booked for entire homes”
“14% of nights booked in 2019 and 24% for the nine months ended September 30, 2020 were for long-term stays”
A couple of weeks ago, Apple announced their new Macbook Air and Macbook Pro with their own designed chip M1. The chip is touted to be much more powerful and power-efficient than all previous Intel chips or many chips on the market. Due to the new chip, the new Macbook Airs won’t have an active cooling system because they will not consume energy aggressively and the battery will last significantly longer, to the tune that, Apple alleged, you may get by the whole day without a charge. The same goes for Macbook Pro, except that the Pros will have an active cooling system. Since the products were available, there have been raving reviews on the Macs with M1, despite some shortcoming such as iOS apps running on the Mac, the touch bar or the quality of the camera (which nobody ever likes). Here are a few excerpts that I found really interesting
Apple’s new Macs based on the M1 system on a chip, the first Macs based on Apple Silicon, are that sort of mind-bending better. To acknowledge how good they are — and I am here to tell you they are astonishingly good — you must acknowledge that certain longstanding assumptions about how computers should be designed, about what makes a better computer better, about what good computers need, are wrong.
Some people will remain in denial about what Apple has accomplished here for years. That’s how it goes.
The M1 Macs are such better machines than their Intel-based predecessors it’s hard to believe. Apple’s battery life braggadocio is warranted. The battery just lasts and lasts and lasts. I’ve been using this MacBook Pro almost exclusively on battery power all week, doing both all my normal work and running benchmarks and performance-stressing tasks, and I can’t come close to depleting it in a full day of work. It never gets hot. In normal use, it doesn’t even get warm. Maybe, sort of, when running a fully-taxing test like the Cinebench multi-core CPU benchmark, it heats up to just past room temperature above the Touch Bar, but it bears no resemblance thermally to a taxed Intel-based MacBook Pro.
As I type this paragraph I’ve been working for just over three hours, nonstop, with the MacBook Pro unplugged the whole time, and the display as bright as I want it to be. The battery is at 80 percent. To say that it offers merely “all day battery life” would require me to work very long days.
Intel and AMD have to talk about gigahertz and power because they are component providers and can only charge more by offering higher specifications. “We are a product company, and we built a beautiful product that has the tight integration of software and silicon,” Srouji boasted. “It’s not about the gigahertz and megahertz, but about what the customers are getting out of it.”
At a human level, all of this means that you will see your system as soon as you start to flip open the screen. Your computer won’t burn your lap when doing zoom calls. And the battery doesn’t run out in the middle of a call with mom. It’s amazing what goes into making these small-seeming changes that, without many of us even realizing it, will transform our lives.
Or this hilarious and awesome review by Joanna Stern
The tech review is fair in giving credit and crap where credit and crap are due. This is to say that so far the new Macs with chip M1 look very good, true to a large extent of what Apple claimed them to be.
This brings me to my main point: with the new chip, Apple is deepening its competitive moats.
Think about it this way, here is what a competitor would need to do to compete with and usurp Apple:
Manufacture a slew of different hardware products like a phone, personal computers, a tablet, wireless earphones and a smart watch
Own the operating systems that power those physical products
Manage a tight integration
Create an ecosystem that features developers and consumers
Offer valuable services such as iMessage, Apple Pay, Health, Apple Pay, iBooks etc…
Stick to the enduring philosophy of offering incremental progress that makes consumers’ life better, instead of achieving meaningless technical numbers
Have a strategy and stick to it
Possess a world-class brand and a boatload of money
Run a sophisticated supply chain that spans across the globe
Design a great chip
Achieve many, if not all, listed above at the same time
Besides delivering values that customers deem worth paying for, the key to succeed in business is to do certain things better than your competition. The more things a company excels at and the more intertwined those things are, the better the outlook for that company is. In the case of Apple, it’s already hard enough to create just a phone to compete with them. Ask Samsung. It’s much harder to keep being competitive at it and try to fight other battles as well. When I look at Apple’s competitors, I don’t see the tight integration between hardware and software that Apple excels at. Google owns Android, but it is not a hardware company. Samsung can produce hardware, but it doesn’t own Android. Apple produces its hardware and owns the operating systems. It already has the coveted software-hardware integration. With the new chip, Apple takes the integration to another level. Now, the chip, the software and the hardware are tightly integrated and we can see earlier on the results of such an effort above. Granted, there are still shortcomings that Apple needs to fix, but that should be expected. There is no perfect roll-out. The next generations of products with Apple’s own chips will be even better; which should be exciting for users, but scary for its competition.
In addition to the tangible aspect, there is also an intangible element here in the mix as well. A company that wishes to emulate what Apple does needs to study how Apple is internally set up and how the long established culture is influencing its operations. You can’t go and ask Ferrari to produce a low cost car while keeping their style. On the other hand, it would be highly challenging to ask Aldi to have a store like Whole Foods. It’s not in their DNA. To be clear, the Apple way isn’t the only way to succeed in the business they are in. Depending on how you define success, there should be more than one way to achieve it, but to achieve the success at the scale that Apple has, their way is the only way so far.
For a company that wants to emulate Apple’s success, it needs to either recreate the Apple way which poses a significant challenge or to have a groundbreaking and completely different idea whose outcome is far from certain. Apple is far from perfect. I find it annoying that they ship buggy software more frequently. They tell you new operating systems work with older Macs. Trust me when I say this: they don’t always do. I had my Mac’s hard drive wiped out so that I could get rid of Catalina. I am still on Mojave because if I upgrade, I may as well buy a new computer. My friends don’t dare to upgrade their MacOS to Big Sur and the only one that did regrets it immensely. I also don’t like their pricey rip-off accessories such as a Mac cord or a wireless mouse. There are other reasons why folks are legitimately annoyed by the company. But all of their shortcomings (who among us doesn’t have one?) shouldn’t dispute the fact that Apple is one of the best run companies out there and their competitive advantages are not only already daunting to overcome, but getting bigger and bigger.
Nothing lasts forever. While I do think we should keep a powerful company like Apple honest all the time, as a business student (I am no longer in school, but never stop learning), I think we should appreciate an extraordinary achievement of a group of people who, despite all the success and $2 trillion+ valuation, keep moving forward. This is a company that is under intense scrutiny constantly and subject to standards higher than what is expected from many other businesses. They aren’t a cheat that scams investors or consumers, and I am using the word “scam” as in promising the moon but delivering nothing. No matter how one may think about it, Apple has delivered products, services and financial performance that few companies can every year since 2007. I learned a lot from this company, let’s just say, both goods and bads. Luckily, the former far outweigh the latter.
DoorDash is a food delivery service which, after receiving an order, will deliver the order to the customer’s door. The service has three main stakeholders: merchants (restaurants), customers who order food and delivery partners whom DoorDash call “Dashers”. The business started in 2013 as three Asian Americans wanted to help local restaurants. The CEO, Tony Xu, migrated to the US at the age of 5 and worked in his mom’s kitchen in his earlier years. It is that background that inspired him to start this business. 7 years later, these entrepreneurs and their team are about to reap the fruits of their labor after the business has grown leaps and bounds and is on the verge of going public. Let’s take a look at how DoorDash makes money
How DoorDash makes money
This is the graphic DoorDash included in its S-1 to explain where its revenue comes from
As you can see, DoorDash generates its revenue from charging customers fees which include typically include delivery and service fees, as well as taking a cut from the merchant side. In 2018, DoorDash introduced DashPass, a subscription that is worth $9.99/month. The subscription will remove per-order delivery fees and reduce service fees for customers. At the same time, DoorDash hopes this subscription will help increase the stickiness of the service and keep the customer churn low.
DoorDash has gone a long way and become increasingly…less unprofitable
According to its S-1 filing, DoorDash grew its market share from 17% in January 2017 to a market-leading 50% in the US in October 2020, besting other contenders such as Uber Eats, Grub Hub and Postmates. Compared to the same period last year, DoorDash tripled its order count and the Marketplace Gross Order Value (dollar amount of all orders) in the quarter ended September 2020. In Q3 2020, the delivery company generated more than $7.2 billion in GOV and received 236 million in total orders. In the last two years, an average order on DoorDash has stayed largely consistent at $30. Since these numbers were recorded after the introduction of DashPass, I wonder what has been the effect of the subscription on the average ticket.
The company grew not only on the top line, but also on the profitability side. Gross margin has steadily increased from 23% in Q1 2019 to a sweet 53% in Q3 2020. Contribution margin, which represents the result when you divide the difference between revenue and variable costs by revenue, went up from -74% in Q1 2019 to 24% in Q3 2020. In other words, for each order, DoorDash didn’t had to spend as much on acquisition and promotion as it had had. In fact, DoorDash reported that existing customers on the platform have increasingly made up the majority of the business, reaching an overwhelming 85% of the total GOV. This is a very good sign for DoorDash as it shows customers love what they sell and stick around more. In business, we often say it costs 5-6 times more to acquire a new customer than to retain one.
While its competitor Uber Eats never sniffs profitability, DoorDash achieved the feat in Q2 2020. While its revenue grew almost 7 times between Q1 2019 and Q3 2020, DoorDash’s operating loss has shrunk 6 times during the same period. To highlight the increased efficiency of the business, Sales & Marketing, which is usually the biggest expense for a multi-sided platform like DoorDash, has been lower than Cost of Revenue for 4 straight quarters through Q3 2020 and stood at 33% in the lastest quarter.
As the business grows, so does DoorDash’s legal trouble. The company spent a few pages only on legal lawsuits, most of which concern its labeling Dashers as independent contractors, instead of full-time employees. The company repeatedly warns investors in its filing about regulations which could adversely harm its business. That’s because if DoorDash has to change its classification, it would mean the company has to pay higher wages and employee benefits. California introduced AB5, a legislation that would force gig economy companies like DoorDash to alter its operating model and classify workers as employees. However, DoorDash got a victory when Californians passed Proposition 22, which essentially stayed AB5. However, I don’t think the legal challenges will end there for DoorDash and they are something that prospective investors should pay attention to.
My thoughts on DoorDash
Clearly, things have been going well for DoorDash. The past few months have seen a substantially positive impact by Covid on the business. More order, more business and higher odds at profitability. Even though DoorDash indicates that their customer base makes up only 6% of the US population, I am pretty doubtful whenever companies cite the Total Addressable Market. First of all, not all the US population will use DoorDash. Second of all, the company has fierce competition from the likes of Uber Eats, Postmates and Grub Hub. I am confident that DoorDash will grow its top line in the next year or two, but the magnitude that the company hints in its filing is not really realistic. On the other hand, DoorDash can grow internationally. The company recently debuted in Canada and Australia. There is no doubt it will make inroads into Uber Eats’ market share, but at the same time it will require more resources from the management.
Recently, we have seen DoorDash strike partnerships that are not food related such as the one with Walgreens to deliver drugs and health products. In the future, I expect to see DoorDash develop to be a delivery platform, not just a food delivery machine. The logic is simple: the more orders there are, the more revenue DoorDash can generate and the happier it can keep customers and drivers. I didn’t see this piece much from the filing, but don’t be surprised if it comes up more in the next couple of years.
Additionally, some people wonder the sustainability of this model as restaurants have to relinquish a significant amount of margin to DoorDash. In the example above, restaurants have to give up 18% ($4 out of 22%) to the delivery service, while it was reported that in some case, the commission could go up to 30%. While it is indeed concerning as some restaurants may resist working with DoorDash and lawmakers may intervene, the fact and the matter is that a commission rate of 15%-20% seems to be the industry standard. Plus, restaurants may find that developing their own delivery muscle and marketing ability won’t be that much cheaper. As we are going through the worst phase of this pandemic so far and the weather is getting colder and colder, diners may favor delivery to in-dining, a huge tailwind for DoorDash.
Some interesting facts from DoorDash’s S-1
Dashers’ age ranges from 18 to 55. 45% of Dashers are women
As of September 30, 2020, there are 5 million DashPass subscribers
DoorDash has 390,000 merchants, 18 million customers and 1 million Dashers on its platform
“In 2019 alone, merchants as a whole experienced 59% year-over-year same store sales growth”
DoorDash’s list of 3rd party partners include AWS, Stripe, Salesforce, Twilio, Wavefront, Snowflake, Olo, Salesforce, Twilio, Wavefront, Snowflake, Olo and Google Maps