Even the greats don’t know it all

I usually take notes of interesting facts, less-known stories, great insights or exciting business ideas for later use. As I went through the notes today, a few interesting stories on Steve Jobs and Peter Thiel stood out. These two are legends in the startup, business and technology world. They are often looked up to as visionaries and outstanding business individuals. And they really are.

But they are not Gods. World-class brilliant as they are, they don’t have a crystal ball or have all the ideas all the time. In other words, they are just humans like us. This is not to downgrade them in any way. Just a reminder that we should learn with a grain of salt, even from the established legends, that it’s normal to make mistakes or miss the boat and that the luck of working with great colleagues/partners and being at the right place at the right time is hugely important.

Steve Jobs on iTunes

But Steve Jobs, of course, had a legendary stubborn streak of his own. Jobs had always conceived of the iPod as a way to sell more Apple computers. He was still married to the idea of the Mac as the digital hub, so he was reluctant to bring iTunes to Windows machines (and thus, the majority of computer users). “It was a really big argument for months,” Jobs recalled, “me against everyone else.” Jobs declared that Apple would do a Windows version of iTunes “over my dead body.” Only after Apple executives showed him business studies that proved Mac sales would be unaffected did Jobs capitulate, saying, “Screw it! I’m sick of listening to you assholes. Go do whatever the hell you want.”

From the book: How the Internet happened

Steve Jobs on App Store

The original, App Store-less iPhone was very much Steve Jobs’ platonic ideal of a closed and curated computing system, a perfect, hermetically sealed device. For several months after the iPhone’s launch, Jobs was actually vocally opposed to the very idea of an app store, refusing to let outside developers infect his perfect creation. He told the New York Times: “You don’t want your phone to be like a PC. The last thing you want is to have loaded three apps on your phone and then you go to make a call and it doesn’t work anymore. These are more like iPods than they are like computers.”

In the end, the battle to do an app store was a replay of the argument over opening up iTunes to Windows users a few years earlier. Just as before, everyone inside Apple wanted to do it, and Jobs kept saying no. But in the end, just as with iTunes, the result was the same. Jobs finally caved, telling those who had been haranguing him, “Oh, hell, just go for it and leave me alone!”

From the book: How the Internet happened

Peter Thiel on Facebook

In the interview below, Peter Thiel (around 7:20) admitted that he didn’t think Facebook was going to be as big as it turned out to be, claiming that he would have been happy with Facebook signing up only college students in the US.

Stories like these are not rare. If you know some, feel free to share in the comment.

A quick explanation on revenue management in hospitality industry

I was lucky enough to have a short amount of time working in the revenue management in the hospitality industry. Personally, I think it is the most exciting part of the industry. There are a lot of moving parts and many factors to be taken into account before a decision is made to maximize revenue. Below is a rough explanation on how it works

Properties have two types of end customers: individual guests who seek for short term stays and corporations which may combine meeting & convention needs with accommodation. Both are represented by the green color. Meanwhile, there are two main intermediaries between properties and customers: travel agents and online travel agents (OTA); both of which are represented by the blue color in the diagram. Properties can also communicate directly to customers.

There are multiple ways in which properties can communicate to individual guests. Guests can call, book via websites or just walk in to book rooms. However, there is only so much a property can do in terms of advertising and marketing. Relying solely on its self appeal, it’s unlikely an average property can fill up its rooms. Hence, it needs travel agents and OTAs such as Booking.com or Expedia. These agents combined can expand a hotel’s reach to a much bigger audience. In return for their services, properties need to compensate the agents.

With regard to OTAs, they will take commission that ranges from 13% to 25%, depending on negotiations between the two parties. They will take payments from guests, save their cut and pass along the rest to properties. Regarding travel agents, room rates are usually combined together with other items such as F&B, transportation and sightseeing, to name a few. Hence, it’s difficult to single out how much they charge for rooms, but it is sure that properties have to give travel agents a lower rate than what is publicly available, meaning that Rate 3 is usually lower than Rate 1 and 2. Otherwise, why would they be motivated to sell on behalf of properties and how would they cover operational expenses? Both travel agents and OTAs check public rates (Rate 2) on properties’ own websites very regularly to make sure that the rates they receive are beneficial. Sometimes, I received calls or emails from agents, asking why their rates were higher than the ones on our website.

As properties have to compensate agents, the question is why. The answer is volume. Travel agents and OTAs bring more bookings to the table and ensure that properties are filled up faster. Hence, a big part of revenue management is to balance out volume and margin. If occupancy is low, properties need to push on all cylinders with attractive rates to sell rooms. As occupancy inches upward, rates need to be raised to maximize the revenue. For instance, if a hotel has only 10 rooms available for a certain day in the next 7 days and is confident that it can sell those rooms directly based on historical data, it makes sense to not sell those rooms to travel agents.

Partnership with agents is more important when it comes to foreign markets. A property in Vietnam welcomes guests from many countries in different continents. Without local partner agents in foreign countries, how could the property reach out to international guests?

The same dynamic between individual guests, agents and individual guests is similar to that between corporate customers, agents and properties.

A property’s room inventory on a given day is limited and perishable, meaning that if a room is not sold, the room night is gone forever. Hence, it’s imperative that a hotel try to sell as many as possible. On top of that, the job of a revenue management person is to maximize the revenue. Below is the list of factors that can influence revenue, including but not limited to:

  • Rates
  • Occupancy
  • Seasonality
  • Competitors’ rates
  • Holidays, local special events
  • Room types & their availability (A suite is sold at a higher rate than a standard room. Hence, if you can sell a suite, why shouldn’t you?)
  • Promotions
  • Historical pick-up rates
  • Historical cancellation rates

In a highly competitive industry such as hospitality, rates have a lot of sway over a booking decision. If you look for rooms in a certain city on Booking.com, a difference of $2 or $5 between comparable properties is pretty significant. It’s easy to sell rooms by lowering rates, but what is the point if no profit is materialized? The hard part is to be able to fill up the rooms and make profit, but it’s also the exciting piece of the puzzle. You have to process a lot of data on a daily basis to make informed decisions, but working in the revenue department allows you to have a pretty good understanding of a hotel’s business. And that’s also what excited me.

A look at Amazon financials (2013 – 2018)

My understanding of Amazon’s business model is as follows:

  • Successfully become a household online store for shoppers and build a loyal user base (Prime members in particular)
  • Leverage the infrastructure (supply chain) for the online store to allow sellers to fulfill orders and sell products through their stores (3rd parties)
  • Leverage the IT infrastructure built to maintain online stores to offer Enterprise IT services (AWS)
  • Leverage the immense traffic to its online sites and ability to turn traffic into orders to sell advertising services to brands

In my free time, I like to go through annual reports of companies to understand their businesses and performance, in addition to reading the news from sources such as WSJ, Techcrunch, CNBC, to name a few. I did it before for Adobe, Spotify and Apple. Below are my findings from digging through Amazon’s financials from 2013 to 2018. Unavailable figures are due to the lack of reporting from Amazon.

Amazon’s total revenue has been growing increasingly fast in the past 5 years

In terms of net income, except for 2014, it has been growing as well, with 2018 as the standout year

With regard to revenue breakdown, every segment, except online stores, has seen its influence on the total revenue grow for the past 3 years (two for physical stores). AWS, in particular, is making up around 11% of Amazon’s total revenue. Amazon started to report on physical stores’ revenue in 2017. As of 2018, it made up around 7% of the company’s revenue.

Despite making up only 11% of Amazon’s total revenue, AWS is responsible for the majority of Amazon’s operating income. The reason seems to be that the company lost money from its International segment

Much has been discussed about the growth of advertising and AWS. The two segments have indeed been impressive. Advertising has gone nuts for the past three years while AWS’ growth has never been lower than 42% since 2013

Shipping costs have been growing at a 2-digit clip since 2013, a concern that many analysts and investors expressed. However, the growth rate has slowed down since 2016

Expenses have been growing at a two-digit clip in the past 5 years

In terms of expense breakdown, Cost Of Sale is still the dominant item, though its contribution to the total expense has been declining steadily. There is one item called Other Expenses in the reports, but I decided to ignore it since it wasn’t significant compared to other items.

Amazon looks to have been successful in diversifying its business, transitioning to more profitable segments from merely relying on the low-margin online stores. With its dominant market share in the cloud and companies moving to the cloud, I believe AWS will continue to grow its importance to Amazon’s first and bottom lines. It also won’t be a surprise to see a middle two-digit growth this year for advertising.

Thoughts on Spotify

Spotify’s business model has been straightforward. Take music from the creators, let users have frictionless access to the content and generate revenue by either ads or premium subscriptions. The company delivers music in an appealing and user-friendly manner to the point that listeners agree to pay a premium for access every month. On the other side, Spotify pays royalties back to artists or labels every time a song is consumed. As the user base grows, Spotify generates revenue from advertisers which want to convey their marketing messages to an engaged audience.

Yesterday, the company announced their latest quarterly earnings and I found the report interesting. First, the number of subscribers. Both Premium Subscribers and Ad-supported MAUs increased.

Source: Spotify Data

There seems to be a seasonality in the subscriber acquisition. Subscriber acquisition seems to pick up more in Q2 and Q4 than in Q1 and Q3. The increase in premium subscribers in 2018 slows down, compared to the pace in 2017

Meanwhile, the Average Revenue Per User (ARPU) has been on decline.

Source: Spotify Data

With regard to revenue, it seems that the increase in subscriber count outweighs the decline in ARPU as revenue is on the rise

Source: Spotify Data

Both Premium and Ad-Supported revenues seem to be affected by seasonality. Ad-Supported revenue growth fluctuates more than Premium revenue growth. In 2018, revenue from ads grew faster than subscription-based revenue.

Source: Spotify Data

Gross Margin for both revenue streams went up with Ad-Supported gross margin growing at a faster clip in the last four quarters

Source: Spotify Data

In Q4 2018, Spotify became profitable for the first time. Free cash flow also reached the all-time high

Source: Spotify Data

Based on the numbers, it seems that everything is going in the right direction for Spotify. User base is expanding, revenue is going up, free cash flow is growing and the company becomes profitable for the first time. Even though ARPU has been declining, it’s understandable as many users were acquired on a discount. However, it’s necessary to maintain the network effect and grow the user base to attract advertisers.

As Spotify doesn’t own the majority of their content and it still has to pay a small royalty for content enjoyed by free users, Spotify faces two significant risks. First, it relies too much on the labels that can take their content elsewhere. Second, paying for content while generating zero revenue from free users might hurt the company’s margin. Hence, it needs original content. Already featuring original series with Amy Schumer and Guy Raz, the company now seems to switch its focus on another source of originals: podcasts.

During the earning call, Spotify announced the acquisitions of Gimlet Media and Anchor. The former is a podcast production company and the latter is a DIY tool that allows publishers to produce and broadcast original podcasts. In the call, CEO of Spotify mentioned that over time 20% of content on Spotify will be non-music and that several potential acquisitions which the company is considering in 2019 will all be related to podcasts.

The acquisitions and focus on podcasts make sense in terms of original content and monetization. Podcasts are gaining in popularity as a form of engaging content. Media outlets have podcasts. Companies have podcasts. Celebrities have podcasts. As an audio platform, Spotify certainly cannot afford to sit this one out. Having podcasts, in addition to music, makes Spotify more appealing. During the earning call, Daniel Elk, CEO of Spotify, hailed podcasts’ positive impact on the engagement of users on the platform. He indicated that podcasts could lure users who wouldn’t have signed up for Spotify. Plus, it’s definitely easier to have access to different content forms on one app than multiple apps. And what’s the better and faster way to be able to produce content than to acquire a proven production firm?

There is also the monetization piece. One revolutionary aspect of Spotify is to help obscure and less-known artists to get their creativity out to the world and get paid. The more their songs are listened through Spotify, especially the Discovery, the more dollars the artists receive. Spotify is in a position to do the same for podcast creators. According to a blog post by Anchor, nearly all podcast advertising concentrates in the top 1% of podcasts. The other 99% have to hope that their episodes are downloaded to the tunes of thousands to be able to attract advertisers. If Spotify can help podcasts generate revenue for their work in the same way as it has done for artists, Spotify can become the Spotify for podcasts and stand a higher chance of securing exclusives and originals in the future.

All in all, I think Spotify is going in the right direction. Securing key capabilities through acquisitions in a key area such as podcasts is crucial to future growth.

How big are AWS and Apple Services?

AWS and Services have gained increasing attention in recent years for their role in Amazon and Apple’s growth respectively. I gathered revenue data on both and compared it to the comparable figure of some famous brands. The comparison should put the size of AWS and Services in perspective. The figures were retrieved from the latest available annual reports of the companies.

The two growing business segments of Amazon and Apple generated more revenue than some of the global household names. In the past 6 years (when the data is available), the segments have grown impressively fast. According to my calculations, from 2013 to 2018, the CAGR of Apple Services and AWS is 18.22% and 52.66% respectively.

Apple’s strategic switch

Disclaimer: I do own a few Apple stocks, but it’s nothing major and this post is just to share my observation of Apple. As a fan of business strategy, I have been a fan of the company and interested in how it performs amid the concerns after the letter to shareholders on 2nd January 2019.

Yesterday, Apple announced their Q1 earnings. A few notable points from their announcement and earning call:

  • Apple no longer reports units sold across their business segments
  • Overall, Apple recorded $84.3 billion, down 5% year over year
  • Products gross margin was 34.3% and Services gross margin was 62.8%.
  • iPhone revenue dropped by 15% year over year
  • Services revenue in Q1 was $10.9 billion, a 19% YoY increase. Service revenue grew from $8 billion in calendar 2010 to $41 billion in calendar 2018, allegedly on pace to reach $50 billion in 2020
  • Mac revenue was up 9% while iPad revenue was up 17%
  • Wearables, home and accessories revenue grew by 33% to $1.8 billion
  • There are 50 million paid Apple Music subscribers, up from 40 million reported in June 2018
  • Apple reported a base of 900 million installed iPhones, out of 1.4 billion active devices in total from Apple
  • There are 360 million paid subscriptions across Services portfolio, an increase of 120 million versus a year ago.
  • This quarter saw 1.8 billion transactions through Apple Pay, twice the volume recorded in the same quarter a year ago
  • In Germany, there are more Apple Pay activations in one week than for Android in one year
  • “Revenue from cloud services continues to grow rapidly with year-over-year revenue up over 40% in the December quarter. And readership of Apple News set a new record with over 85 million monthly active users in the three countries where we’ve launched the United States, the U.K., and Australia”.
  • Ending Q1 2019, Apple cash stands at $244 billion while net cash is at $130 billion

I am a big believer in the notion that business models need to be adapted to the changes in the business environment. No business model could be effective while staying still over the years, especially in the fast-changing world that we live in today. Apple should be no exception and from the numbers reported, it seems to me that they are making changes.  

For years, the bulk of Apple’s business has come from hardware which is differentiated by its exclusive software, especially in the case of iPhone. iPhone revenue has made up approximately 60% of Apple’s turnover. However, the luxury smartphone market has reached the maturation point. iPhone unit sale growth has been either minimal or flat for quarters. Greater China market, which makes up 20% of their iPhone revenue, has boasted challenges to Apple, particularly in 2018. Their iOS isn’t as appealing to Chinese users as it is to users in other parts of the world while competitors such as Huawei and Xiaomi offer alternatives with more or less same features at a lower price. The macroeconomic conditions in China and the trade war aren’t helpful either.

The growth in iPhone revenue has come largely from the price hike which lengthens the upgrade cycle and puts a limit on how much Apple can reach out to potential users. Not everyone can afford those pricey phones. Lowering the prices isn’t the solution. Firstly, Apple is a luxury brand. Lowering prices may leave significant damages to its brand power. Secondly, cheaper phones will require substantial changes to its operations, including supply chain, distribution and Sales & Marketing.

All the signs point to the fact that too much dependence on iPhone is no longer sustainable for Apple moving forward. Enter Services.

Services has been a bright spot amid concerns over iPhone revenue for the past 2 or 3 years, growing at a 20% annual clip. Put that in perspective, their Services revenue this quarter alone is $10.9 billion, almost equal to Netflix’s revenue in 3 quarters in 2018 while Facebook Q3 revenue was about $13 billion. Instead of making money from devices, Apple is betting on users keeping devices longer and paying consistently and more for services. And why not? If the users tend to hold on to devices longer, it makes sense to generate more money from their activities. Plus, margin from Services is substantially higher than that of Products.

And they have been doing a good job. Apple Pay transactions reached 1.8 billion this quarter, 100% YoY increase. Revenue from cloud went up by 40%. The number of paid subscriptions grew by 50% year over year and Apple Music has added 10 million users, reaching the 50 million mark and achieving a 25% growth, since June 2018.

As of June 2017, developers earned $70 billion from App store since its launch in 2008. As of January 2019, the figure went up to $120 billion. Moreover, we are about to see their investment in original content as their streaming service is reportedly going to be live this April.

In summary, Apple seems to be heading to the right direction strategically in my opinion, given the changes in the environment they are operating in. I think the following guidance in the next few quarters will continuously be lower than analyst expectations as the reduction in iPhone revenue may not be sufficiently offset by the growth in Services yet. There is a chance that Apple won’t have the same revenue level as they had at the peak of iPhone-dominated era.

Nonetheless, I think the company is far from the demise alleged by some after a letter to shareholders on 2nd January 2019. They generated $84 billion in revenue and almost $20 billion in net income in 90 days! Instead, the change to be a Services company may be better for the company’s health.

Book: Monetizing Innovation: How Smart Companies Design the Product Around the Price

If you are interested in business strategies and how companies price their products or services, I highly recommend this book. Its thesis can be summarized into: Product the price, don’t price the product. The authors argued that businesses have a better chance at a successful product/service launch if the businesses do meticulous market research beforehand, figure out the willingness to pay from the end users, find out what they want and how much they are willing to pay for the desired features, and finally build the offerings around the price points. A few notable examples that should be studied by business students include:

  • How Porsche could sell 100,000 of their new cars while Fiat Chrysler could only sell 25,000 of theirs
  • How Michelin switched from selling tires to selling kilometers traveled on their premium tires
  • How P&G rose to capture the majority of market share in the razor category in India
  • How DealShield protected billions of dollars in vehicle purchases and earned Manheim millions in revenue and profit

On Compromise Effect

For example, imagine you are in a wine store and want to buy a bottle. You find three options: a $10 bottle, a $25 bottle and a $40 bottle. Which you would you pick? When asked this question, most people would pick the $25…By introducing the $25 wine, you just made the decision process much easier for everyone. They’ll choose the middle option. This strategy is very common in both B2B and B2C companies

On Anchoring Tactics

Another illustration of anchoring is the Economist magazine’s A/B pricing experiment. The experiment divided people into two groups, A and B. The A group was given two choices: $59 for an online only subscription and $125 for a print and online combination. The B group was offered three choices: $59 for online only, $125 for print only and $125 for the print/online bundle. The $125 print-only option was an anchor. Some 84% chose the print/online bundle in group B versus only 32% who chose that bundle in group A.

On Price Conveys Quality

In a 2008 study, Ariely and his colleagues gave two sets of participants the same pill, telling them it was a painkiller (it was a placebo). Informed that the price was $2.5 a pill, 85% of the participants in the first group said the pill reduced their pain. Told the painkiller’s price was discounted to 10 cents, only 61% of the second group believed the pill reduced their pain.

On Apple Watch

At first, it was available only through Apple’s website and the cheapest version was priced at $349, not very cheap. However, Apple’s launch largely drew negative reactions. One stock analyst noted that a components supplier for the watch had produced fewer units than projected, hinting at underwhelming sales. His comment appeared in a July 31 Wall Street Journal headline that sniped, “Glimmers Emerge on Apple Watch Sales and They’re Not Pretty”

All of this was not what Apple wanted to hear. Yet despite the negative press, despite the warnings of purportedly in-the-know investment analysts and reviewers and the rumors of lagging sales, Apple did not drop its price. It held firm.

Based on International Data Corporation and investment analyst estimates of Apple Watch sales from April through September 2015 (the second half of Apple’s most recently completed fiscal year), Apple sold an estimated 8 million watches. Assuming most sold for the entry price of $349, that would make it a $2.8 billion product in its first six months of life.

GDPR – Positive impact on firms

Last May, GDPR officially went into effect. Under GDPR, users are given more privacy rights and firms have to adhere to stricter privacy regulations than ever unless they want to be subject to hefty fines. Under GDPR, fines can go up to 20 million euros or 4% of a firm’s global revenue. In the case of companies such as Google or Facebook, which earns to the tune of billions of dollars in annual revenue, the fines could be significant.

I have been in favor of GDPR. Even though it’s not perfect as in the case of any laws enacted for the first time, I believe that with GDPR, we are going in the right direction. Below are a few examples:

According to Cisco 2019 Data Privacy Benchmark Study:

GDPR-ready companies are benefitting from their privacy investments beyond compliance in a number of tangible ways. They had shorter sales delays due to customer’s privacy concerns (3.4 weeks vs. 5.4 weeks). They were less likely to have experienced a breach in the last year (74% vs. 89%), and when a breach occurred, fewer data records were impacted (79k vs. 212k records) and system downtime was shorter (6.4 hours vs. 9.4 hours). As a result, the overall costs associated with these breaches were lower; only 37% of GDPR-ready companies had a loss of over $500,000 last year vs. 64% of the least GDPR ready

Ads trackers were reduced, leading to faster loading pages and more pleasant user experience. Big firms are held more accountable. Google was fined $57 million for its GDPR violations. Without the new regulation, I believe that the amount would have been much less. California passed their toughest privacy laws after being inspired by GDPR.

There is an argument that GDPR might lead to less competition in the advertising fields as only the likes of Google and Facebook have the resources to meet the requirements. An initial study seemed to support that.

Nonetheless, I think that even without GDPR, who could challenge Facebook and Google when it comes to serving ads? At least when there are more rights and protection given to the end users, we get some power back to the users and hold firms to a higher standard. After all, innovation comes only from our raising standards, doesn’t it? Hence, GDPR is still a good move in the right direction and should be improved incrementally in the future. As a result, firms should pay more attention to privacy and security. It will no loner be a check-off-the-list item. It will be a competitive advantage moving forward, especially when everything goes digital.

Book: How the Internet Happened

If you are interested in technology, the intersection of business strategy and technology and the history of the Internet, this book is for you.

It is a succinct chronicle of how Web 1.0 (connecting computers all over the world) and Web 2.0 (connecting all people) happened. Accounts of some of the most iconic and important technology companies in the world were told without lengthy anecdotal details. The author walks you through how Netscape, Yahoo, Google, eBay, Paypal, iPhone and Facebook, to name a few, came into beings and shaped the personal computing. It’s fascinating to read about the bubble in 2001. The fact that companies could raise tons of money regardless of the lack of business models and revenue, let alone profit, is surreal.

Arguably, the biggest point that I get out of this book, in addition to nice history lessons, is that success greatly stems from serendipities. Without an enabling technology, infrastructure or business environment, we wouldn’t have had the household technology names that we do today. For instance, without Netscape developing the Navigator and SSL, who knows whether we would have had different browsers, online payments and arguably the Internet? Without the existence of broadband connection, it’s likely we wouldn’t have had Web 2.0.

Timing is everything. Being early is equal to being wrong, as many companies which went out of business for being ahead of their times could attest. If you doubt the role of luck in success, read this book.

After this book, I can’t wait to read a similar one on the rise of cloud computing and everything that it enables.

DuckDuckGo

DuckDuckGo is a pro privacy search engine that is available on almost all browsers. Unlike Google, DuckDuckGo does not profile you online, meaning that the search engine doesn’t collect your information or track you everywhere so that the information can be used to tailor ads. DDG has been doing pretty well. Here is its traffic report:

Source: DuckDuckGo

I use both Google and DuckDuckGo on my Mac, with the latter as my default search engine. Even though DDG does the job most of the time and gives me reasonable results, it is not as good as Google. I am not even talking about the personalization of searches. Below are the two examples that shows DDG has some work to do.

Search Results

When you look for a location, DDG doesn’t offer immediately a map option on the engine to the location. Here is my trying to find Ted and Wally’s, a known ice cream shop in Omaha.

There is nowhere I can find its opening hours, address or direction to the place immediately. Here is how it looks on Google, with the same keyword

There is a lot more information given by Google. Instead of multiple clicks to find out the basic information, I don’t even have to go anywhere to know the address, phone number and opening hours. Direction is just one click away.

Search Time Frame

With DuckDuckGo, you can only filter searches as far as the past month.

On Google, the options are much more varied.

I love DDG. The team believes that it is possible to have a profitable search engine without profiling users. It’s been killing it. However, I hope that they can bring more improvements to the engine and make it better so that one day I will be an exclusive user of DDG, instead of having both DDG and Google on my computer right now.

If you haven’t used DDG and you care about your privacy online, try it because as mentioned, it does the job.