Weekly reading – 15th May 2021

What I wrote last week

App Tracking Transparency & Apple Search Ads

Business

Why DoorDash and Uber Eats Delivery Is Costing You More. The service and delivery fees seem to be bigger than they were before Covid. I am not so sure if that trend is positive to the future of these delivery companies. At some point, it would hurt the relationship with merchants

Walmart is losing its grips on grocery. I don’t really expect Walmart to catch up with Prime soon, but it’s a bit surprising to me that the company is losing its lead in grocery, their bread and butter.

A sensible and good writeup on Epic vs Apple. I may be biased towards Apple as it is my first ever stock, but if you are a reasonable person, you likely won’t look at what Epic did and does, and support them.

Vietnamese startup Nano raised $3 million seed round. I believe this should be one of many fintech startups from Vietnam in the near future.

The Korean Chatroulette-style dating app quietly taking over the world

JPMorgan, Others Plan to Issue Credit Cards to People With No Credit Scores. It’s past time that companies take into account other factors in giving prospects credit cards or not.

What I found interesting

Biggest ISPs paid for 8.5 million fake FCC comments opposing net neutrality

Apple AirTags vs. Tile: The Best Tool for Finding Your Lost Stuff. The current generation of AirTags may have weaknesses and their performance isn’t eye-opening yet. But give it some time and I believe it can be another great segment in addition to AirPods and Apple Watch

Fact-checking Modi’s India. It’s just mind-blowing how the truth can be bent that much so that some people gain so much power.

The Verge has a good article on Federated Learning of Cohorts (FLoC), a new initiative by Google as preparation for life after 3rd party cookies

Jony Ive’s advice to the next generation of designers

Stats that may interest you

Consumer prices increased by 2.6% for 12 months ending March 2021. Perhaps it’s time to be rigorous in saving your money, unless you can increase your income.

App Store stopped more than $1.5 billion in potentially fraudulent transactions in 2020

App Tracking Transparency; Apple’s Advertising Business

In this post, I’ll talk about App Tracking Transparency (ATT), how Apple is different from Facebook and how Apple’s own advertising business is seemingly exempted from it

What is App Tracking Transparency?

Starting iOS14.5, apps have to ask explicit consent from users if they want to track users across different apps and websites. At the heart of the matter is whether advertising platforms such as Facebook should have automatic access to Apple users’ Identifiers for Advertisers (IDFA). IDFA is a unique identifier for your device. It is to your device what Social Security Number is to you personally. Traditionally, the likes of Facebook did have access to IDFA by default. Users had to opt out of cross-app tracking. Facebook used IDFA to deliver personalized ads. For instance, after learning that you just bought some sporting gears from Scheels, they could serve you ads for sporting equipment from other retailers. Also, IDFA helped Facebook measure the effectiveness of their ads. If you get served an ads from a chocolate brand and proceed to actually buy some from it, Facebook can tell the brand that their ads helped convert you into a buyer.

With the introduction of App Tracking Transparency (ATT), access to IDFA by default was severed. Developers now have to seek explicit consent from users whenever they want to regain such access. In a popup, developers can tailor their message to users and make their case as to why allowing tracking is to the users’ benefit.

Source: Apple

How Apple and Facebook differ in their approach to advertising

Before we proceed, let’s take a moment to talk about how Apple defines tracking. Here is Apple:

Tracking refers to the act of linking user or device data collected from your app with user or device data collected from other companies’ apps, websites, or offline properties for targeted advertising or advertising measurement purposes. Tracking also refers to sharing user or device data with data brokers.

Examples of tracking include, but are not limited to:

– Displaying targeted advertisements in your app based on user data collected from apps and websites owned by other companies.

– Sharing device location data or email lists with a data broker.

– Sharing a list of emails, advertising IDs, or other IDs with a third-party advertising network that uses that information to retarget those users in other developers’ apps or to find similar users.

– Placing a third-party SDK in your app that combines user data from your app with user data from other developers’ apps to target advertising or measure advertising efficiency, even if you don’t use the SDK for these purposes. For example, using an analytics SDK that repurposes the data it collects from your app to enable targeted advertising in other developers’ apps.

The following use cases are not considered tracking, and do not require user permission through the AppTrackingTransparency framework:

– When user or device data from your app is linked to third-party data solely on the user’s device and is not sent off the device in a way that can identify the user or device.

– When the data broker with whom you share data uses the data solely for fraud detection, fraud prevention, or security purposes. For example, using a data broker solely to prevent credit card fraud.

– When the data broker is a consumer reporting agency and the data is shared with them for purposes of (1) reporting on a consumer’s creditworthiness, or (2) obtaining information on a consumer’s creditworthiness for the specific purpose of making a credit determination.

Source: Apple

Long story short, Apple allows that an app can track you within its property and your data doesn’t leave your phone. It’s also not tracking if the data sharing is for an official purpose that is not ads-serving. Think about it this way. When you walk into a Walmart and walk around the aisles, the cameras inside the store can tell Walmart what you like and what you don’t. I rarely venture into a Walmart’s candy or cheese aisle. I am fine with Walmart knowing it because the store is their property and I have a direct relationship with them whenever I shop there. However, it would be not OK if Walmart struck a deal with Starbucks that allows the two companies to share my shopping behavior in their stores with each other without my consent. It would be really creepy.

The same goes for our data on mobile device. Facebook can serve us ads based on our behavior on their properties, including the big blue app, Messenger, Instagram or Whatsapp. To Apple, that’s possible and allowed. However, it is no longer allowed that Facebook follows users across websites & apps, and uses such knowledge to serve ads without our consent. A permission has to be granted first.

Shortly after the introduction of ATT, Apple debuted their Apple Search Ads. Apple Search Ads enables developers to serve users ads on the Search Tab of the App Store. According to the company, 70% of App Store users used the Search tab to find apps and 65% of searches result in downloads. Hence, it’s a valuable real estate to both Apple and developers. To enable targeted ads, Apple groups customers into segments based on data that they retrieve from:

  • Apple ID: name, age, location, gender, or anything that you list on your Apple ID
  • Device information: language setting, device type, OS version, mobile carrier
  • Apple News & Stocks: topics and categories that you interact with
  • App Store: searches on the App Store. Downloads from the App Store and in-app purchases are only allowed when the targeting is done by the app’s developer. Said another way, the fact that you downloaded Call of Duty and the stuff you bought inside the app can only be used for targeting by Call of Duty itself, not somebody else

Apple has received a lot of criticisms since the introduction of Apple Search Ads. Some critics say that Apple has a double standard for its own advertising business because there is no popup to ask for users’ permission with Apple Search Ads. The criticism is misguided in my opinion. The reason why there is no permission seeking from Apple is that the company uses only first-party data (data that users already give Apple and data that is created & gathered on Apple’s apps) for targeting. It doesn’t use data gathered on other apps to serve you ads on the App Store. Based on how Apple defines tracking as I laid out above, it is not tracking. In fact, Apple’s definition of tracking is similar to that of World Wide Web:

Tracking is the collection of data regarding a particular user’s activity across multiple distinct contexts and the retention, use, or sharing of data derived from that activity outside the context in which it occurred. A context is a set of resources that are controlled by the same party or jointly controlled by a set of parties.

Source: World Wide Web

In the case of Facebook, it wants to get users’ data OUTSIDE its property apps for targeting. With ATT, Apple wants their rival to at least ask us, the users, for permission to use our own data. To Facebook, it’s unfortunately a bridge too far. I mean, I am not naive enough to think that financial benefits aren’t in Apple’s calculations when they plan out ATT and Search Ads. The difference here is that while Facebook makes money at the expense of user privacy, Apple found a way to generate more revenue and still honor our privacy. Other critics say that Apple creates its own advantage because, with ATT and the new Search Ads, Apple is likely the only party that can track app download conversion. It is true that Apple will likely be the only advertiser that can tell developers whether their ads are effective. But does Apple have a duty to allow Facebook to track users and know the conversion from the App Store in the first place? If a native Facebook shop that lives entirely on Facebook runs a Google ads to get people to come to the store and make purchases, will Facebook let Google know whether and when a purchase is made? I don’t think so. Hence, why does Facebook want something from others that it doesn’t want to do in the first place? Plus, whether we download an app is our data. Why should Facebook’s desire to know that be put above our privacy? It’s a weird criticism, if you ask me.

In short, Apple has been a company with a perspective and excellent, like wealthiest-in-the world excellent, at making money with their products and services true to that perspective. In this case, Apple thinks it can deliver targeted ads while respecting users’ privacy and making, I assume, a great deal of money in the process. If there is anything I think Apple could have done better, it’s the communication and the timing of ATT and Apple Search Ads. But overall, I think I agree with this Twitter user

Disclosure: I have a position on both Facebook and Apple (I know, I know)

Weekly reading – 8th May 2021

What I wrote last week

Amazon continues to impress with another blow-out quarter

Uber & Gopuff. Amazon Prime Video streams NFL games in 2022

Uber’s Delivery is on fire despite $600 million expense set aside for the driver dispute in the UK

Business

How Apple does M&A: Small and quiet, with no bankers. Information is extremely valuable in business. Apple’s known culture of secrecy is meant to keep competitors from knowing what it has in the pipeline. We don’t often see Apple make huge purchases. Instead of buying companies to grow the top line, they focus on the people, especially technical engineers. That’s a smart move.

A great Business Breakdown episode on Twilio. If you don’t know about the business, have a listen.

What Is a Business Model? 54 Successful Types of Business Models You Need to Know. This type of content renders expensive MBAs obsolete.

Clubhouse’s downloads plummeted in April. I have been on Clubhouse for 2 months, and yet I haven’t made it to the end of one single chat. Plus, it’s not appealing to the end users that there is no recording. Not everyone has enough time in a day to wait for talks to come and listen to everything. Not so surprising to see the app’s popularity take a huge blow. I just wonder what a16z saw in it.

Amazon Expanding Garage Grocery Delivery to more than 5,000 cities

A great podcast episode on Visa. This company probably has one of the strongest moats out there. Its market cap is higher than those of big banks.

How Shopify’s network of sellers can take on Amazon

What Is an Entertainment Company in 2021 and Why Does the Answer Matter?

What I found interesting

Green gold: Avocado farming on the rise in Africa

Playlists and podcasts? Netflix is exploring developing ‘N-Plus’

Stats that may interest you

60% of Instagram users eligible to link up with their Messenger account did use the feature

20% of electric vehicle owners in California switched back to gas because charging is a hassle. This is indeed not great news for EV as well as hydrogen cells. But I believe that the great potential of green energy cars is here to stay and we’ll overcome this challenge somehow.

Facebook Workplace reaches 7 million paid subscribers. I do wonder how far Facebook’s push into the corporate world will go. I don’t see how they can overcome the disconnect between their own brand and the seriousness that the 9-5 world carries

95% of iOS 14.5 users disabled App Tracking. There are two sides of this debate. Proponents of privacy applaud this move by Apple because it aids consumer privacy and stops cross-app tracking. Critics say that Apple’s motive isn’t altruistic. Instead, they argue that Apple wants to harm the advertising industry, to inadvertently strengthen the position of Google & Facebook and to boost Apple’s own advertising business. Well, when two parties have conflicting interests (advertisers and consumers), Apple must choose one to side with and in this case, whatever their motive is, they side with consumers.

Social commerce made up 40% of Southeast Asia’s $109 billion e-Commerce in 2020

Uber’s Delivery is on fire. Driver dispute cost $600 million, but may be a blessing for the business

Uber is well on track to a full recovery. Delivery continues to be the bright spot

Yesterday, Uber released their financial results for Q1 FY2021. In general, the overall business mostly recovered from the impact of the pandemic. Even though it made fewer trips and less revenue than last year, gross bookings rose by 24%. Mobility Gross Bookings continued to be down year over year as countries are still battling Covid-19. On the other hand, Delivery Gross Bookings increased by 166%, up to $12.5 billion from $4.7 billion a year ago, due to strong demand. To put it in perspective, Uber generated almost as much Gross Bookings in Delivery in Q1 2021 as it did in the entire year of 2019.

Uber's Mobility and Delivery Gross Bookings
Figure 1 – Uber’s Mobility & Delivery Gross Bookings

In Q1 2021, the company’s adjusted EBITDA was -$360 million, but it was up from the loss of $612 million a year ago. Mobility was still profitable, albeit down 49% YoY. Delivery and Freight remained loss-makers, but the loss narrowed compared to Q1 2020. According to Uber, Delivery was profitable on the adjusted EBITDA basis in 12 markets in Q1 2021. Take rates for Mobility and Delivery were 12.6% and 14%, respectively. Mobility’s take-rate dropped from their usual 20% range because Uber took a draw-down of $600 million for driver expenses following the High Court’s verdict in the UK that would force Uber to classify drivers as employees. Without the draw-down, Mobility take rate would be 21.5%. Delivery’s take rate has been steadily increasing since Q4 2019. As the platform continues to grow in scale and fine-tune its operations for higher efficiency, I expect to see Delivery take rate to hover around the 14-15% range.

Uber's Mobility & Delivery Take Rates
Figure 12- Uber’s Mobility & Delivery Take Rates

Driver-friendly regulations can be both a threat and a blessing for Uber

This is the first time that investors could, to some extent, quantify the impact of regulatory threats on Uber’s business. Yesterday, the Biden administration rescinded the previous administration’s rule which would have made it more difficult for drivers to be considered employees. The Secretary of Labor also mentioned that drivers should be treated as employees with benefits instead of just contractors, but stopped short of announcing a concrete policy change. That’s why Uber’s executives repeatedly emphasized that they would engage in dialogues with the federal government moving forward to find an agreeable solution and that it’s not doom and gloom yet for their business.

Some are justified in their pessimism for Uber. A driver-friendly regulation would definitely hurt Uber’s bottom line in the short term. In the long run, I am not so sure. Any new regulation regarding gig workers would affect not only Uber, but also and more importantly its smaller rivals. Every company from Lyft, Instacart, Doordash to Gopuff will have to pay more personnel expenses. But few of them have the scale and resources that Uber does. Take Lyft as an example. It operates in Canada and the US only and doesn’t have a Delivery service like Uber, at least not yet. As a result, it would have a higher driver expense per order than Uber because the latter could stretch the fixed expense over many more Ride/Order. That’s a unit economics advantage that comes with operating in more markets, more verticals and at a higher scale.

Figure 3 – Uber’s Outside Equity

Plus, if Uber decided to pay drivers more than others, it could lock in drivers exclusively on its platform and create a driver supply problem for its smaller rivals. Fewer drivers mean slower services. Slower services lead to less satisfied customers. Less satisfied customers result in less business. That’s the vicious cycle that Uber could inflict on its smaller rivals. Plus, Uber has about $13 billion in equity in the likes of Grab, Aurora or Didi. If push comes to shove, it can sell off all of it to finance its operations, something that I doubt other delivery services can do.

Other positive developments

Uber mentioned that its Delivery would debut soon in Germany. Germany is arguably the biggest consumer market in Europe and it doesn’t make sense to not have one of its main business lines in the country. As a new market, Uber may have to take a loss in the short run to establish its presence, among local competitors. Since the CEO took over, Uber has scaled back operations in areas where it didn’t believe it had competitive advantages. If they decide to launch in Germany, there may be a good reason.

This may be the first time I remember that Uber specifically called out its advertising business. While it’s not really surprising, it has plenty of potential. As a household name that has millions of users on its platform, Uber is an attractive partner to merchants. Hence, it makes sense Uber wants to monetize its valuable real estate on its app. Advertising is a higher margin business and should help Uber with its profitability goal.

Additionally, the company also mentioned that its New Verticals (grocery, alcohol and convenient items) reached an annualized Gross Bookings of $3 billion in March. The revelation contained some caveats such as: what does “annualized” mean? What is the distribution of such Gross Bookings between grocery, alcohol and convenient items? Nonetheless, with the acquisitions of Drizly, Postmates and the partnership with Gopuff, it’s a vertical to watch out for in the future.

Uber & GoPuff. Amazon streams NFL games on Prime Video in 2022

Uber boosts its grocery delivery with GoPuff

Per Bloomberg:

Uber Technologies Inc. will vastly expand grocery delivery in the U.S. this summer through a partnership with GoPuff, a fast-growing delivery startup and the owner of the liquor store chain BevMo!, the companies plan to announce Tuesday.

GoPuff will make inventory of convenience store and grocery items available to Uber customers in 95 cities starting next month and nationwide by the end of the summer, the companies said. GoPuff will handle logistics and delivery for the orders, and Uber will take a percentage of each transaction made through its app.

GoPuff, which was founded in 2013, is a delivery startup that focuses on “essential items” such as snacks, pet products, beauty products or liquor. The model on which GoPuff operates is a bit different from other delivery services. Instead of having their drivers pick up items from the stores, GoPuff distributes orders from their micro-fulfillment centers strategically located in markets across the US. According to the startup, it is now operating 250+ fulfillment centers and serving more than 650 cities.

In terms of unit economics, every order on GoPuff has to be at least $10.95. The company charges users a flat delivery fee of $1.95 for every order and claims that there is no surge price. For orders that contain alcohol, there is an additional $2 to cover extra efforts to verify identifications and meet legal compliance. To avoid the flat delivery fee, users can enroll in their rewards program called GoPuff Fam for $5.95/month.

By partnering with Uber, GoPuff is hoping to use Uber’s popularity to drive more traffic and business. Once orders and revenue increase, it will make other aspects of the business easier to manage such as acquiring drivers or pleasing investors. The risk here is that the startup is sharing the customer relationship to Uber. Handling the delivery of every order from this partnership, GoPuff still interacts with the end customers. Nonetheless, at the top of the funnel, customers will still place orders within Uber. Plus, a portion of the sales goes to Uber for the privilege to be in their app. I really hope that GoPuff will structure the deal that enables them to have a marketing communication customers at the end of every order such as a coupon or discount for direct orders.

For Uber, this partnership will boost their Delivery service. While Covid-19 has (still) greatly damaged Uber’s Mobility business, it has been a game changer for the company’s Delivery business (UberEats). In Q4 FY2020, Delivery generated more than $10 billion in Gross Bookings, up from $4.7 billion just a year before. The acquisition of Drizly and Postmates highlights the importance of Delivery to Uber and the company’s ambition to be a Superapp.

The partnership with GoPuff gives Uber extra bodies. Even with drivers under the startup’s brand, Uber can still satisfy their customers with properly filled orders. But I think this partnership may be an audition or a test for what may come next. I won’t be surprised if Uber makes an offer to acquire GoPuff. There will be a lot of synergies in case of an acquisition: similarity in services, savings in marketing and personnel. More importantly, in GoPuff, Uber would acquire a network of micro-fulfillment centers and a new delivery model.

Excited to see what comes next from this partnership and space.

With 15 NFL games a year starting 2022, Amazon is making Prime Video a strategic advantage

Per WSJ

Amazon will take over exclusive video rights for “Thursday Night Football” starting in the 2022-23 season, a year earlier than anticipated, the company and the National Football League said Monday. Initially, Amazon’s deal with the NFL called for the tech giant to begin streaming games in the 2023-24 season. Current rights holder Fox Corp. agreed to exit its existing deal for the package a season early.

Terms, including the cost of acquiring the additional year of rights, weren’t disclosed. In March, Amazon signed a 10-year deal with the NFL to stream 15 games per season on its Prime Video platform. The average annual rights fee is around $1.2 billion and that is the price tag for the additional season, people familiar with the matter said.

At $1.2 billion for 15 games a year, that works out to $80 million per game. A significant price tag. But Amazon can afford to pay it. Not because of their financial strength, but also because of their Prime base. In the latest earnings call, Amazon revealed that there were 200 million Prime members, 170 million of which watched Prime Video in the past year. American football is very popular in the US, but is not everyone’s cup of tea. Let’s say if only about 20 million US subscribers watch NFL games on Prime Video, the content cost will sit around $4 per member per game. If 40 million US subscribers (12.5% of US population, not a wild guess), the content cost will go down to $2 per member per game. The more people Amazon can get to watch games, the lower that number will be. The scale of their Prime base makes Amazon one of a handful of companies in the US that can afford to invest that much in NFL games. Also, this benefit doesn’t include additional new Prime members that are on the fence and decide to subscribe to the service because of the NFL games.

Yes. Just in terms of strategy, I think there’s probably nothing new or surprising, but just to reiterate it, we look at Prime Video as a component of the broader Prime membership and making sure it’s driving adoption and retention as it is. It’s a significant acquisition channel in Prime countries. And that we look at it and see that members who watch video have higher free trial conversion rates, higher renewal rates, higher overall engagement. And there’s great examples of places like Brazil, where you launch a video-only subscription, for example, that preceded the broader Prime membership with shipping components, and that was, as an example, a great way to expose people to Amazon.

By Dave Fildes, Amazon’s Director of Investor Relations in Q1 FY2021 Earnings Call

As an end user myself since 2017, Prime Video has gotten so much better over the last few years with a bigger content library and more originals that I actually enjoy such as Jack Ryan or sports documentaries. My friends, both in the US and Germany, also have good things to say about the service. It’s no longer a peripheral service. As Dave Fildes said, it is an important component of the Prime membership to acquire and retain customers. In the fight against Walmart and their membership program Walmart+, Prime Video will prove a key advantage for Amazon. Walmart may be able to match Amazon in a lot of things, but it doesn’t have yet an equivalent to Prime Video. Plus, it’s not cheap for Walmart to catch up with its rival. Amazon spent $3 billion in video and music content alone in Q1 FY2021, up from $2.4 billion a year ago. That’s an annualized $12 billion in content, putting it up there among the biggest spenders. If Walmart wants to enrich Walmart+ and offers an equivalent to Prime Video, they are looking at a very expensive game. Even with an increase in content and shipping costs, Amazon has still generated more than $25 billion in Free Cash Flow Trailing Twelve Months in the last four quarters. As their other businesses grow and continue to pump cash into their coffer, we may see Amazon spend $20 billion a year in video and music very soon.

Amazon's Free Cash Flow Trailing Twelve Months
Amazon’s FCF TTM

Disclaimer: I have a position on Amazon, Walmart and Uber

The Amaz(on)-ing story continues

A few days ago, Amazon released the results of their Q1 FY2021 and did not disappoint. You can find their results here. Below are some of my takeaways and charts for illustration purposes

A growing giant

This is the first quarter where Amazon’s average 4-quarter rolling net sales exceeded $100 billion. Think about the scale for a month. In other words, for the past 365 days, Amazon generated more than $1 billion per day on average. What’s more impressive is that their YoY growth has been on an upward trajectory for the past few quarters, hitting 44% in the recently reported one. That’s the kind of growth you often see at companies at a much smaller scale, not a company that is well on track to produce half a trillion dollars in sales a year.

Amazon's YoY growth in revenue

I don’t know where their next growth will come from and that may be the scary thing about this behemoth

Among the three main segments, North America is the biggest in net sales, almost double the combined figures from AWS and International. Bewilderingly, it has been growing at a higher clip than AWS in the past four quarters, lacking behind International, whose YoY growth just hit an astounding 60% in this quarter. If you look at the segments’ size, their growth figures and growth trajectory, it’s not straightforward to say which one will drive Amazon’s growth in the future. If Amazon can crack the Grocery and Last-Mile code in the US, it will be huge for their North America numbers. In terms of International, there is still a lot more to gain. Take Vietnam as an example. My country’s retail market is huge and growing fast. Yet, there is no such equivalent of Amazon. There are indeed big players such as Shopee, Tiki or Lazada, but they are eCommerce players and the breadth of their offerings isn’t as extensive as what Amazon can offer. Plus, if you ever try the apps of these companies, you’ll chuckle and say to yourself: if somebody can offer a better shopping experience, there is a lot of money to be made here. Lastly, global companies are going through digital transformation, a trend that is accelerated by Covid. It’ll be a boon to AWS’ business.

There are bull cases to make for each of these segments. I honestly cannot tell where the next growth will come from. Not because there isn’t. But because there are more than one obvious answer. For good measure, all three are now profitable. International used to be the black sheep, but it has been profitable for the past four quarters.

Amazon's North America, International and AWS YoY growth in revenue

Amazon's North America, International and AWS 4-quarter revenue rolling average
Amazon's North America, International and AWS Operating Margin

Advertising and 3rd party are growing fast, but don’t sleep on physical stores

Among the business lines, 3rd party and advertising, both high-margin, were the fastest growing with the former growing at 64% YoY and the latter at 70% in this quarter. At $80 billion annual run-rate, 3rd party is highly impressive, growing at 64% YoY. Amazon doesn’t break down 3rd party for domestic and international markets, but it’s not strange to think that as Amazon gains foothold in more overseas markets, more merchants will want to get on the platform. Meanwhile, advertising almost reaches a run rate of $25 billion, growing 4x in the last 3 years. Impressive as it is, there is still plenty of room to grow, both domestically and internationally. As Amazon’s online stores attract millions of buyers, advertisers will be interested in promoting their products or services on a platform where the intention to buy is high.

Amazon's business lines' revenue growth

Even though physical stores’ growth doesn’t look particularly great, don’t sleep on them. Physical stores were first reported by Amazon in 2017. They are relatively new and I consider them strategic investments from the company. Amazon will not be able to compete with Walmart in groceries’ scale and the network of stores as well as fulfillment centers across the country. Hence, they will likely use technology and efficiency in delivery as competitive advantages. Hard to pull off, cashierless stores will save Amazon on personnel costs and provide a differentiated shopping experience for customers. They may also play a role in Amazon’s network of middle and last mile delivery. Eventually, customers may still receive cheaper groceries from Walmart, but some may be more interested in a different shopping experience and expedited delivery from Amazon.

In the United States, we’re delivering out of our Whole Foods stores, and we’ve engaged — we’ll be allowed to pick up a greater expansion of pickup at Whole Foods stores. Amazon Fresh became a free Prime benefit, as you know, in the late part of 2019. And customers really adopted it and continue to see strong growth. So I think on the fresh stores, it’s a little too early. The stores themselves, we’re confident that the Just Walk Out technology that will be a boon, a benefit to customers.

Source: Amazon’s CFO from Q1 FY 2021 Earnings Call

Weekly reading – 1st May 2021

What I wrote last week

Olo, a SaaS company specializing in services for restaurants

The year the Earth changed

Business

Match’s Winning Formula for Online Dating in Japan Gives Women Control, Makes Men Pay. It’s amazing that an app available only in Taiwan, Korea and Japan is the 3rd highest ranked dating app. The ability to infuse a local culture and etiquette into an online dating app is a strength not to be discounted. Also, tucked in this article is IAC’s expertise in identifying hidden gems and turning them into diamonds

Florida is the latest state to create e-commerce tax. This development will be a boon to tax applications. The complexity of handling state taxes will spur SMBs or corporations to adopt these applications

Amazon lets advertisers send targeted messages for first time

Hey Google, Who Has the Best Capital Allocation in the Internet Sector? Google/Alphabet definitely has a shot at being the best capital allocator with their acquisition of YouTube, DoubleClick and Admob. There are various smaller acquisitions that we probably don’t know about

iOS 14.5: A Guide to Apple’s New App-Tracking Controls. I already opted out of all the apps

Music Streaming Royalties 101

What I find interesting

Newark cops, with reform, didn’t fire a single shot in 2020. It’s baffling to me that we put a lot of regulations in place for doctors, nurses or bankers, but we somehow find it impossible to keep the police in check and accountable. What happens in Newark is proof that we can reduce police brutality AND crimes. It’s socially and economically great for our society. It happens in a big city in New York. So what’s the excuse again for not trying?

Why the U.S. Still Can’t Donate COVID-19 Vaccines to Countries in Need. I understand that these drugmakers want to protect themselves from liabilities. But seeing Indians die by the thousands while the US has a lot of unused AstraZeneca doses just doesn’t make any sense. Contract or not, I am confident all parties can come to agreeable conclusions on how to save a nation. In fact, nations for that matter.

Exclusive Photos Inside the Chernobyl Nuclear Power Plant. If you haven’t watched the mini series Chernobyl on HBO, I really recommend it.

A working study by University of Chicago suggested that length domestic travel bans might lead to higher Covid infections

Stats that may interest you

Apple has 27 registered developers and rejects around 40% of the submitted apps

In FY 2019, developers earned almost $11 billion in total revenue from the App Store

The year the Earth changed

If you haven’t watched the documentary “The year the Earth changed” on Apple TV+, do yourself a favor: Subscribe and watch it! I guarantee it’s worth $5 you’ll pay, which still is less expensive than a lot of drinks at Starbucks.

The pandemic forced many of us to go into lockdowns, especially around March and April last year. The unusual pause in human activities led to a once-in-a-lifetime drop in human disturbance in the natural world. That is what this documentary is all about. The crew went to different parts of the world to record what happened to the Earth when humans paused for a change. They pieced together a beautiful story of how much the natural ecosystems benefited from our short-term retreat; which, by extension, is a condemnation of how detrimental our existence is to other species.

One example that I remember very well is how tourists to Africa endanger the lives of cheetah cubs. Cheetahs are the fastest sprinters in the world. They run fast because of their slender build. But it is exactly that build and the tendency to live individually that put them at disadvantage against other hunters such as lions or hyenas. Mother cheetahs are responsible for keeping their cubs safe and feeding them at least once every two or three days. The hunts are not always easy. Mother cheetahs may have to run very far away from their cubs to be able to catch and kill preys. Once a kill is completed, there begins a dilemma. Dragging a prey back to the cubs is a laborious task that may invite unwanted guests in hyenas and lions, against which the lonesome cheetahs stand little chance. Going back to fetch the cubs can protect the weak younglings, but mothers and children may find themselves with empty stomachs because the food will likely be stolen. Hence, mother cheetahs naturally use discreet and distinct voice to call the cubs over. They cannot make too big or too frequently a sound because danger always lurks around and the position of their powerless cubs may be compromised. Naturally, cheetahs adapt to the surrounding conditions to develop their ability to communicate with each other safely. Until humans. As tourists with all the noisy jeeps and talk make it exceedingly challenging for the cubs to listen to the call of their mothers. In the documentary, experts said that the pause in tourists to where cheetahs live increased the livelihood of cheetah cubs.

Listening to the engaging narration of David Attenborough and watching how other species’ lives amazingly became so much better without us is simply jaw-dropping. I couldn’t believe how much a disturbance we humans are. This pandemic is a blessing in disguise. No more theories. No more what-ifs. What happened in nature when we took a break was real. There is now recorded evidence that there is so much that we can and must do to protect our environment and other species.

An excellent documentary. Really thankful to those that put it together.

Get to know Olo – that SaaS company with eCommerce solutions for restaurants

If you haven’t heard of Olo before, but want to know about it, grab a drink and read on.

What is the company about? What does it do?

In 2005, Noah Glass founded Gomobo to let consumers order food in advance with just a text message. Apparently, he convinced an investor to shell out half a million dollars for his startup idea and relinquished his chance to get into Harvard Business School in the process. Five years later, in 2010, he took a fateful decision to pivot the business from being a forefront customer facing application to a B2B one working behind the scenes to help restaurant manage their online orders. He named the new identity Olo, which is an abbreviation of “Online Ordering”. More than a decade later, Olo went public in March 2021 at a valuation of $3.6 billion, after raising a modest $100 million from outside investors in its history.

Olo products include Ordering, Rails and Dispatch. Ordering is the company’s flagship module that enables restaurants to quickly establish its online presence, manage online orders and seamlessly handle integration with internal systems such as rewards or Point-Of-Sale (POS). If a restaurant has each of its infrastructure elements (website, mobile app, reporting tool, payment processor, rewards and POS) developed by a different vendor, it’ll be a pain to get these inconsistent fragmented systems to talk to one another. Worse, the fragmentation makes combining data to produce a holistic view of the business a time-consuming endeavor. In this day and age, operating blind without data is similar to walking in to a gun fight with a screwdriver. Ordering’s value proposition is that it can help restaurants have a single source of truth, build an integrated infrastructure and do all of the following in one simple tool: manage online orders, offer customers a nice online experience, run reports, make informed and timely decisions or manage menus.

Additionally, Rails helps restaurants manage and centralize orders as well as menus on different platforms. Restaurants partner with aggregators such as DoorDash or UberEats to leverage its marketing and delivery prowess. However, there are a couple of challenges involved in this kind of partnership. If restaurants update menus once a month, how much time is usually lost in ensuring the new changes are reflected properly on each of the aggregators’ apps? When orders from these aggregators come in, how easy is it to combine the order data with a restaurant’s own data? The idea behind Rails is that it is a one-stop shop where menus are up-to-date on all contact points and orders are centralized.

And finally Dispatch. As you can tell from the name of the module, it deals with the delivery aspect of a restaurant’s operation. This module allows restaurants to incorporate delivery into the order process right from their website or mobile app.

How does it make money? How has the company performed financially?

Olo makes money through subscriptions and transactions that it processes. Every Olo customer has to be an Ordering subscriber, paying the company a monthly fee for access to its foundational and flagship module. A typical Ordering subscription contract usually runs for 3 years, even though restaurant operators can cancel it with a 90-day notice. In addition, it’s up to restaurants to add Rails and Dispatch or not. Unlike Ordering, the other two modules are on a transaction basis, meaning that the more transactions a restaurant processes through Rails and Dispatch, the more revenue Olo makes. As the transaction volume grows, restaurants have to pay a higher Ordering subscription fee to enable the excess in transactions. Plus, aggregators have to also compensate Olo for the luxury of working with its customers.

As of December 31, 2020, Olo’s customer portfolio featured almost 400 names and more than 64,000 active locations. The company recorded $98.4 million in revenue, up from $50.7 million in 2019 and $31.8 million in 2018. Covid-19 was a big boon to Olo’s business as restaurants were forced to go online. Its gross profit ballooned from the high 60%s in 2018 and 2019 to 81% in 2020. After running in the red for the previous two years, Olo became operationally profitable in 2020 with $16 million in operating income.

Olo's Income Statement
Figure 1 – Olo’s Income Statement. Source: Olo

In its S-1, Olo offered a few data points to show the stickiness and growth of its business. For the last three years, its Net Dollar Retention Rate was higher than 120% every year. This number means that Olo extracts more revenue from existing customers from this year than the previous. In 2020, transaction revenue made up 43.3% of platform turnover, up from 6% only just two years ago. It is a reflection of the exponential growth in Gross Merchandise Value from $2 billion in 2018 to $14.6 billion in 2020. Because of that eye-popping expansion in GMV, Olo handles on average 2 million orders per day. For a company that focuses only on the US and the restaurant industry, I’ll say it’s not too shabby. While 44% of Olo’s customer base used all three modules in 2019, the figure shot up to 71% a year later. These numbers show that its ecosystem is growing and sees more buy-in from customers.

Why restaurants choose Olo?

Covid-19 made consumers more accustomed to ordering food online. Even when this pandemic blows over and diners go back to physical restaurants, the popularity as well as marketing power of apps such as DoorDash or UberEats will keep food online orders alive. Operating in an intensely competitive field, restaurants cannot afford to stay completely offline, but it can be daunting and time-consuming to set up a digital presence. Olo addresses the infrastructure pain points for operators by offering turnkey solutions that both lower the initial investments and shorten the development time.

Plus, Olo also offers values by integrating different systems into a one-stop shop. Instead of juggling from one system to the next, operators can carry out fundamental and essential tasks on one Ordering dashboard. That lowers operational stress and brings improved efficiency which, in turn, means an increase in margin. And in the cut-throat restaurant business, every percentage point in margin counts.

Another value proposition from Olo is that it allows operators to maintain direct relationship with customers. Aggregators bring visibility, sales and delivery capability to restaurants, but they also take away the direct relationship with the end users. A Doordash customer that wants to make a Five Guys order, does so from the Doordash app, not from Five Guys website or mobile app. The customer relationship here exists belongs to Doordash and in business, who owns the connection with customers wields power (just look at Amazon or Apple to understand this point).

With Olo, restaurants have a chance to own the customer relationship while still being able to work with delivery partners like Doordash or UberEats. When a restaurant uses Rails and Dispatch to handle delivery, the business process will be as follows: a customer will go to the restaurant’s branded website or mobile app to make an order. The customer will be informed of the delivery details and make a payment. In the backend, Olo collaborates with a delivery partner to work out the delivery. The merchant receives the payment, owns the relationship with the customer and only has to pay Olo for its cut. Olo, in turn, reimburses the delivery partner accordingly.

Olo's Dispatch Payment Flow
Figure 2 – Dispatch Payment Flow. Source: Olo
Figure 3 – Deliver partners own the relationship
Figure 4 – Merchants own the customer relationship

While Olo does have a lot to offer to restaurant merchants, it remains to be seen whether the actual net benefit is positive. After all said and done, do merchants benefit financially by working with Olo, net all the fees? As Olo gains more bargaining power over merchants, will they raise the subscription and transaction fees?

Moving forward, Olo has some tailwinds behind its sail. With an existing customer base of 400, there is a lot of market share out there to gain in the future. Moreover, as the company’s operation is currently in the US only, an international expansion, while having its risks, can significantly expand its TAM. It’s also worth noting that Olo has positive free cash flow and no outstanding debt; which is a good position to be in if it wishes to make hefty investments.

With that being said, Olo has some fierce competitors in Chow Now, Wix, Square, just to name a few. The likes of UberEats and Doordash are at best “frenemies”, especially the latter. As of December 31, 2020, DoorDash made up 19.3% of Olo’s total revenue and essentially made up the entire Rails segment. But the two companies were recently embroiled in a lawsuit in which Doordash accused Olo of cheating them and violating the contract. The two settled afterwards, but it goes to show the business risk of relying on one partner for 20% of revenue.

In summary, given Olo’s vertical knowledge in the industry and its value propositions, I can see growth ahead in the near future. If we consider Olo to aggregators what Shopify is to Amazon, Olo then should take a page out of Shopify’s playbook. Shopify has aggressively forged partnership with Pinterest, Facebook and Walmart to bring sales and visibility to its merchants. That’s what the likes of Amazon, Doordash and UberEats are great at. Consumers know them and they can bring a lot more eyeballs than others. Olo already has solutions to domestic pain points for merchants. Now it may need to also think about how to address the external ones, aka sales.

Weekly reading – 24th April 2021

What I wrote last week

On Apple’s new product: AirTag

Apple TV+, Netflix and the battle between Walmart and Amazon

Business

Google used ‘double-Irish’ to shift $75.4bn in profits out of Ireland. It’s good to know that 2020 was the last year that the “double Irish” loophole could still be exploited. I am curious to see the impact that the phase-out has on US corporations.

WSJ’s short profile of Korea’s “King of Ramen”

AirTag location trackers are smart, capable and very Apple

The Future of Apple Podcasts

Etsy SEO: How to Optimize Your Shop & Listings for Search

How Netflix and social media helped F1 buck a global sports sponsorship slump. F1 is an extraordinary sport and deserves to be the pinnacle of motorsports around the world. If you look below this entry, you’ll see a graphic showing how F1 cars can go into corners at a speed that we travel on a highway. On the straights, F1 cars can hit 360kmh. The technology that goes into building these cars and the skills that go into driving them are the best in the world. Yet, I still feel that F1 isn’t as popular as it should be. “Drive to Survive” and the resilience shown during 2020 really helped the sport become better known

What I find interesting

Typography at U7 station in Berlin

You can pay at Whole Foods Market with your palm now. While it is incredibly cool and convenient, I don’t think I will jump at the chance to use it soon. Amazon isn’t really known for their privacy practices. I am not too willing to give away my biometrics to them yet.

F1 cars can slow down by 144kmh in 1 or 2 seconds and carry over 150kmh into corners. Just think about that for a second. These cars drive into cars at the speed that is often the top you can reach on the highway

Source: F1

Stats that may interest you

Morning Brew has 3 million subscribers. It’s amazing what you can do with great writing skills and consistency

iPhone 12 models accounted for 61% of US iPhone sales in fiscal Q2 2021