Weekly reading – 26th December 2020

Last episode of 2020

What I wrote last week

Amazon’s bullying tactics and my thoughts on some antitrust issues

My review of Wonder Woman 1984 and why I like it

Business

Streaming Is Stalling: Can Music Keep Up in the Attention Economy?

The economics of the human hair trade

The global boom in neobanks – digital banks

Reuters reported that Apple Car might be coming soon in a few years. Much as I want to see that happen, I still remain pretty doubtful

Substack has more than 250,000 paid subscribers and the top 10 publishers earn more than $10 million/year

The death of department stores

Telegram is approaching 500 million active users and selling ads

Technology

YouTube’s recommendations try to give you toxic content, alleged an engineer who used to work on their algorithm

A few folks rendered a million webpages to find out what made websites load slowly

What I found interesting

A 9000-year-old Stonehenge-like structure was found under a lake in Michigan

Early humans may have slept through devastating winters

An insider story on why Vietnamese people in South Korea sent their infants back to the homeland on repatriation flights

Some amazing photos of Phan Thiet, Vietnam some decades ago

Life of an Iranian woman in Iran during Covid and amidst crushing sanctions from the US. Every time I read these stories, I am thankful for the life I currently have in the US. Is it perfect? No. But I’d be a damn fool not to appreciate it.

What’s the danger with Vietnam’s motorcycle helmets?

Wonder Woman 1984 is a solid movie with an important message

I paid $16 today for HBO Max with the sole intention of watching Wonder Woman 1984. It was money well-spent as far as I am concerned. If you are still on the fences about the movie or if you’re looking for something to watch, I recommend that you give it a try.

The movie is a sequel of the previous Wonder Woman. It was in 1984 and Diana Prince was working at the Smithsonian in Washington DC as an expert. Steve Trevor was still dead and Diana still missed him dearly, wishing to have him back every day. One day, the Museum received a historical item that could grant a person with one wish, as long as the person touches the item upon making the wish and the so-called Dreamstone could take away one thing in return that the wisher might not know yet.. All hell broke loose from there. I am not giving away spoilers here, but the ending is beautifully bittersweet and the cast did a great job, especially the chemistry between Chris Pine and Gal Gadot. Plus, it’s not too often that we see a male playing a supporting role to a female hero. That is a refreshing change I can get behind. But I have two biggest take-aways from this movie.

Every one of us has something in our life that we are not pleased with, that we want changed. A bigger house, bigger eyes, more money, more time in our youth, a better paying job, a healthier body or a fancier car, you name it. The item, called the Dreamstone, in the movie grants a person the wish and takes something in return. We make trade-offs like that often in our life. Sometimes some of them are more obvious in the short term than others. Like, if you have a reasonable pay and a job that makes you happy and excited to go to work every day, would you trade it for another job with an additional $100k that yet would make you miserable every day? If an investment job paid you extremely well but took away 16 hours of your day and left you little to enjoy life, would you still be up for it?

The question would be even more profound if what you wish for was at the expense of many others. Said another way, if your refusal of one thing you ever wish for contributed to the collective well-being, would you still make that sacrifice? The movie, in the end, came down to that question. I find it very relevant with the current pandemic we have to deal with here. If many of us had made the sacrifice on the personal level and done the right thing, especially in America, we would have been in a far better situation today. If we had worn a mask and practiced social distancing…If we had put the collective well-being of the society above our personal freedom…If the politicians in charge had put their duty above their thirst for power…

The movie also reminded me of gratitude. I too have things in my life that I wish to change. Some of them remain short-term terms that keep me going every day and looking forward to in the future. But being obsessed with wishes can often carry me away from being appreciative of what I currently have. In the middle of a pandemic and a winter that is going to get harsher, I have my own apartment that keeps me warm and safe, a job that helps me put food on the table, people that I love and can reach out every day, and health that has shielded me from trouble and expensive bills. Can it be better? Sure, but a lot of people are in a worse situation.

Sometimes I find myself in a bad mood because I am consumed by jealousy of others and the wishes that may or may not happen in the future. 30 years of living taught me enough to get myself back to appreciating the present, most of the time. Books and movies like Wonder Woman 1984 do help as well. For that reason, I consider my subscription to HBO Max money well-spent, though I struggle to find anything else to watch, apart from the new Wonder Woman.

A friend asked me today how I was going to spend the rest of this eventful year. Being isolated in an apartment without much work, I answered: relaxing and self-reflecting. It has been a tough year so far, but it also came with some positivities for me in the last 300 days; which I may talk about in the next few days. The most important thing is that I am sitting here, able to blog about a new movie instead of being in a hospital or worse, dead or toiling away in a 2nd or 3rd or 4th job on a cold Friday night to make ends meet. That’s what I appreciate the most.

Amazon’s bully tactics and my thoughts on antitrust issues

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.

Predatory Pricing

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.”

Source: WSJ

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

Source: FTC

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.

Source: WSJ

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

Weekly reading – 19th December 2020

What I wrote last week

Adobe’s impressive performance and Disney’s true unveiling of Disney+

My thought on Apple vs Facebook and some data on iOS14 adoption

Business

Reviews of Apple Fitness+

Amazon is planning to offer a telehealth service to companies

A very interesting interview with the founder and CEO of Shopify on how to manage time.

A great letter from Brian Chesky on Ron Conway and his impact on AirBnb

Technology

This founder dodged a huge bullet after unintentionally racking up a Google Cloud Platform bill worth more than $70k+. Something to watch out for.

An interesting post that compares the new and old versions of Apple Map in Canada

What I found interesting

A new species of whales was discovered in Mexico. I kinda had mixed feelings after reading this. On one hand, I was glad we made this discovery. On the other, there may be some ignorant and greedy people trying to hunt them down for food or just an ego booster.

Reuters ran a piece on how the Coronavirus has evolved

A piece of good news. The Amazon seems to grow back

An inside story on how Pfizer achieved a miraculous feat in the race to produce a Covid-19 vaccine.

Apple vs Facebook and its iOS adoption

Apple vs Facebook

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:

Source: The Verge and The Verge

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

Image
Source: Tim Cook

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

Source: 9to5Mac

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

iPhone iPad iOS 13 adoption
Source: 9to5Mac

Disclaimer: I hold Facebook and Apple stocks in my personal portfolio.

Adobe’s impressive performance and Disney flexing its streaming muscles

Disney’s enormous potential in the streaming area

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

Investor Day 2019Investor Day 2020
Disney Plus
Subscriber60-90 million by FY 2024230-260 million by FY 2024
ProfitabilityFY 2024FY 2024
Hulu
Subscriber40-60 million by FY 202450-60 million by FY 2024
ProfitabilityFY 2023 or 2024FY 2023
ESPN+
Subscriber8-12 million by FY 202420-30 by FY 2024
ProfitabilityFY 2023FY 2023
Source: Disney

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.
Source: Adobe

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.

Weekly reading – 12th December 2020

What I wrote last week

How much money could you save from drinking coffee at home?

Business

The economics of the $2B+ Christmas tree industry

Bloomberg’s profile on OnlyFans, a potential major social media on the horizon

Uber sold its autonomous vehicle arm to Aurora. This move isn’t a surprise given that Uber has been trying to offload cash-intensive and loss-making businesses in order to focus on the ones that do make money. Though there is a big write-down from $7.5 billion to $4 billion, investors may find this deal good news

CNBC has a good article on AT&T, HBO and their effort to compete with Netflix and other streamers

Inside Google’s deal with French Media

Many Google employees came out with their version of the story involved Timnit Gebru, contradicting what the company publicly said

WSJ’s profile on a few men that helped build Microsoft’s gaming business today

Online grocery slowed down in the last few months compared to the height in the summer. The basket size continued to be relatively big, compared to the same period last year and pre-Covid months.

https://www.brickmeetsclick.com/stuff/contentmgr/files/1/495948404a0913f7ced51b6524a17539/files/bmc_scorecard_nov_2020_sm.png
Source: Brickmeetsclick

Clover, which belongs to Fiserv and sells hardware & software payment solutions to small businesses, a competitor of Square, seems to have a higher GPV as well as a higher percentage of sellers with $125k in annual GPV. As Clover has more than 90% of its sellers above the $125,000 GPV threshold, the figure is far smaller for Square.

Source: Fiserv

Technology

John Gruber’s review of Apple’s latest product: AirPods Max

What I found interesting

A story on a small coffee business in Vietnam that prioritizes sustainability

Benefits of walking

The US Department of Health and Human Services published a presentation on how unhealthy Americans’ diet is. The information is informative and use, but the presentation is hilariously terrible.

The old Americans get, the more they spend time alone

How much money you may be wasting on coffee shops?

We have all heard about the importance of savings. But what if we look at savings from another perspective? What if we look at how much potential earning excessive spending could cost each of us?

Take coffee consumption as an example. All credit to this Twitter user for inspiration to use coffee as an example. Many of us love to drink coffee every day, but a coffee from a branded or local indie shop can cost around $5-6 per cup. Depending on the consumption level, one person can spend a lot of money on drinking coffee outside per year.

Cups Per Week12345
Total Cost Per Week ($6/cup) (including tips) $              6  $            12  $            18  $            24  $            30 
Total Cost Per Year (52 weeks) $          312  $          624  $          936  $       1,248  $       1,560 

What if we substitute drinking coffee at a shop for drinking coffee at home? We all know that drinking coffee at home will save us a lot of money, but let’s run an experiment and find out approximately how much money can be saved. Here are two combos A) one 12oz bag of ground coffee that is in the cheap range and a French Press from IKEA that costs $9 and B) a slightly more expensive bag of coffee and a Metallisk at $20.

Either of these combos should be enough for a cup of coffee at home every day. For the sake of argument, let’s say every year a person needs 18 of these bags to have one cup of coffee a day. Combined, 18 bags of Dunkin Ground Coffee and the French Press will cost $120/year. Since we like to drink coffee with some milk, let’s throw in another $30 of milk and round it to $150/year. Here is how much drinking coffee at home would save a person:

Cups Per Week12345
Total Cost Per Year (52 weeks) $           312  $          624  $           936  $          1,248  $          1,560 
Total Cost Per Year From Combo A $           150  $          150  $           150  $             150  $             150 
Saving from Combo A $           162  $          474  $           786  $          1,098  $          1,410 

Over a long period of time, the compound interest will make these savings much more valuable in the future. Let’s look at four scenarios where the annual interest rate we can earn from these savings, whether it’s from a bank or investment in stocks or from dividends, is 3% to 10%

Cups Per Week12345
Total Cost Per Year (52 weeks) $           312  $          624  $           936  $          1,248  $          1,560 
Total Cost Per Year From Combo A $           150  $          150  $           150  $             150  $             150 
Saving from Combo A $           162  $          474  $           786  $          1,098  $          1,410 
Annual Rate at 3% $      12,215  $     35,740  $      59,265  $        82,791  $      106,316 
Annual Rate at 5% $      19,570  $     57,259  $      94,949  $      132,638  $      170,328 
Annual Rate at 7% $      32,341  $     94,627  $    156,913  $      219,199  $      281,486 
Annual Rate at 10% $      71,700  $   209,789  $    347,878  $      485,967  $      624,056 

Essentially, what the table above means is that drinking coffee at home using Combo A would save a person on a 3-cup-a-week routine more than $300,000 after 40 years at the annual rate of 10%. Even at a more moderate rate of 5%, it would still be around $100,000, a significant sum for most of us.

Here is what the savings would look like with Combo B and the same criteria

Cups Per Week12345
Total Cost Per Year (52 weeks) $           312  $          624  $           936  $          1,248  $          1,560 
Total Cost Per Year From Combo A $           200  $          200  $           200  $             200  $             200 
Saving from Combo A $           112  $          424  $           736  $          1,048  $          1,360 
Annual Rate at 3% $        8,445  $     31,970  $      55,495  $        79,021  $      102,546 
Annual Rate at 5% $      13,530  $     51,219  $      88,909  $      126,598  $      164,288 
Annual Rate at 7% $      22,359  $     84,645  $    146,931  $      209,218  $      271,504 
Annual Rate at 10% $      49,570  $   187,659  $    325,748  $      463,837  $      601,926 

From this example, there are two lessons. 1/ the compound interest is a powerful tool to learn and have in our favor. The sooner a person learns about it, the better and 2/ If a person is even only decent at maths and knows the power of compound interest, explaining savings in this manner could be more powerful than just talking about it. Personally, I wish my parents or teachers in Vietnam had taught me this when I was 15. I would have saved so much money from all the shenanigans and earned some from putting the money into an index fund or a high dividend yield stock.

You may argue that the scenarios are a bit extreme and that each of us should enjoy what life has to offer. Well, that may be right, but coffee isn’t our only sin, is it? How about regular food from Chipotle, the 5th streaming service of the month, the 20th bottle of perfume or the 15th pair of shoes? The point of this exercise isn’t to arrive at the exact figure, but to look at the opportunity cost of excessive current spending. A moderate control of spending and savings will help each of us save a lot of money, even after we enjoy the occasional delicacies.

FYI, here is a Future Value calculation I made, using Financial Calculators

Weekly reading – 5th December 2020

What I wrote last week

The three changes I made to my lifestyle during Covid

Business

Shopify’s Black Friday sales in 2020 exceeded $2.4 billion, a 75% growth year over year

Reddit now has 52 million daily active users, up by 44% YoY

An excellent piece on the longevity of some amazing small businesses in Japan. A mochi shop that has been around for more than 1,000 years? You read that right. 1,000 years, not 10, not 100, not 500. 1000! And many of them maintain enough in reserve to continue operations for 2 years in case there is an economic downturn.

Some great statistics on Spotify’s podcast ecosystem

Apple officially launched their new App Store Small Business Program. An important detail to note is that the $1million threshold is after Apple takes its cut, not before. Hence, it will give many developers more breathing room.

How Apple approached its retail stores during Covid

Technology

A deep dive into why M1 is so fast

What I found interesting

A Russian female chess player beat known male players in the 1920s and 1930s, apparently the inspiration for the series “The Queen’s Gambit” on Netflix

A horrifying account of how hospitals are struggling to keep up with the rising number of Covid-19 patients. It’s unfathomably insane to read, like a fictional story, not what actually is transpiring.

100 powerful pictures of 2020 by Reuters

The Sistine Chapel of South America. It looks utterly amazing

Derek Thomson of the Atlantic wrote about Democrats’ problems and what is wrong with the Electoral College. Read the excerpt below. If you support the GOP, then it’s good news. But if the shoe is on the other foot, as in the case for Democratic voters, saying that it is unfair is a massive understatement

The GOP currently holds both Senate seats in Alaska, Arkansas, Idaho, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Nebraska, South Dakota, and Wyoming. Those 11 states have 22 senators who collectively represent fewer people than the population of California, which has two Senate seats.

In the 2018 midterms, Democratic Senate candidates won 18 million more votes than Republicans nationwide, and the party still lost two net Senate seats.

One analysis of Census Bureau data projected that by 2040, roughly half of the population will be represented by 16 senators; the other, more rural half will have 84 senators at their disposal.

Source: The Atlantic

Three important changes I made to my life during Covid-19

Like all of you, I saw my life changed suddenly and dramatically in March 2020. Omaha, where I currently reside, registered its first case and my company shortly sent us home to work. For a good reason. Since then, I have been in self-isolation, almost close to 9 months now, and it will not change any time soon as we were already told that we wouldn’t be back to the office until next summer. Unlike a lot people, I am alone in the US. I don’t have any family member to surround myself with. My girlfriend is in Vietnam, which has closed its borders since March as well. Alone and isolated in my own apartment, I got to make some changes and I did. Here are the biggest three that I want to share, in case they are useful somehow

Exercise more with The Body Coach TV

It’s not easy to stay fit and healthy while in isolation. Especially when you don’t like running. I understand all the health benefits of a regular run, but it’s just not for me. The gym had been closed for about 6 months and opened its doors again two months ago. However, I still don’t want to go to a place where sweating and sharing surfaces with other people are a norm. Those two things can quickly become ingredients of a Covid-19 nightmare. Hence, I needed to find a way to exercise effectively in my small apartment. Luckily, I found this great channel called “The Body Coach TV”. This channel is owned and developed by Joe Wick, a British fitness enthusiast. He regularly posts short workout clips that range from a few minutes to about 30 minutes. The workouts are either full body High Intensity Interval Training or specifically developed for a muscle group such as upper body, lower body or abs. Spend 20 minutes a day on one of these clips and you can easily burn 250 to 300 calories at least. I have been on a 2-day-training-1-day-off schedule for months and it has been going well so far. I feel good every day after a workout (not exactly the case 10-20 minutes right after) and my girlfriend complimented me on looking leaner. Give it a try. This is the clip I did today. It’s pretty intense, but good.

Recalibrate my eating and find my interest in cooking

Back in July, I came across a research on how our body consumed energy. Apparently, it turns out that we don’t need to eat twice a day to have enough energy to function, an assumption and a habit that I blindly followed for 20+ years. I decided to change my eating routine to only once a day, around late afternoon. For the rest of the day, I resort to healthy food with low carb such as avocados, cantaloupes, chia, soy milk and Greek Yogurt. Pine apples and nuts are sometimes included as well. White rice was replaced by red rice and select vegetables such as broccolis, mushrooms, carrots, asparagus, beans, okras or tomatoes are regulars. It was a bit tough in the beginning, but gradually I grew accustomed to the new diet, but still have enough energy for work and a High Intensity Interval Training (HIIT) workout.

As a fan of matcha and coffee, I felt gutted for not being able to frequent local cafes any more. So I decided to invest in equipment to make matcha and coffee at home such as ground coffee, matcha powder, a small aluminum pitcher, an espresso maker from IKEA and a milk frother. If you consume 2-3 caffeine drinks a day like myself, I think you likely will save some money from not having to pay $5 for a latte.

Additionally, my interest in cooking shot up. Isolated at home and glued to my computer for hours a day, I sometimes feel restless and agitated. Besides a short workout, cooking relaxes me. Because I don’t want to invest too much money on kitchenware, my preference is simple recipes which require ordinary equipment from every kitchen, like this one:

I like Gordon Ramsay’s channel. He usually has great and short videos with instructions that an idiot like me can follow

Learn German

The next big change I made is to decide to learn German. With all the free time I have, I figure that I should learn something useful instead of just doom-scrolling on Twitter or surfing the Internet. After weighing all the pros and cons of the options such as a spoken language, an online degree or a coding language, I decided on German. It is the most spoken language in Europe, behind English. An acceptable command of German could open the door professionally for me to European markets later on, in case Trump won or something happens in the US. Since I already code like 5-6 hours a day at work, I don’t feel really like coding in my free time. An online degree just doesn’t excite me. So German it was! I found two very good resources: Germantogo.com and the Easy German channel on YouTube. With a 365-euro annual subscription, you can have access to on-demand video lessons from A1 to B1 and have any questions answered by Juliane, the owner of the site. It’s similar to having a private tutor, but virtually. I have been learning German for 4+ months with Juliane and totally enjoy it.

Meanwhile, Easy German is a YouTube channel which features short video clips through which German learners can improve listening and vocabulary. The Easy German team comes up with a topic question every week and interviews German native speakers on the streets. A casual setting brings the natural speaking pattern and choice of words. Plus, you can learn something about the German culture as well. If you want to learn German like I do, give those two sites a try. Below is a bit about me in German (show-off alert!!!)

Ich heiß Minh. Ich komme aus Vietnam, aber ich wohne in Omaha, Nebraska. Ich wohne seit 4 Jahren hier. Ich bin 30 Jahre alt. Ich spreche Vietnamesisch, Englisch und ein bisschen Deutsch. Ich lerne seit 4 Monaten Deutsch. Es ist eine schwierige Sprache, aber ich mag sie. Weil ich zu Hause bleiben muss, denke ich, dass ich etwas Neues lernen sollte. Warum nicht Deutsch? Ich arbeite in einer Bank in Omaha. Meine Hobbys sind Fußball, Basketball, Formel-1, Tennis, Lesen, Schreiben, Reisen und Kochen. Wer bist du? Was machst du?