Weekly reading – 31st July 2021

What I wrote last week

I wrote down a few thoughts on Netflix

Business

A great Business Breakdown episode on Petco. If you are not too familiar with the company or the pet supply industry, it’ll be worth your one hour.

Singapore Airlines Doubles Down on the E-Commerce Trend by Carriers. “In November, Singapore Airlines [SIA] CEO Choon Phong Goh described Pelago during an investor call as “a brand new business that’s been set up within SIA” with a goal of “extending the SIA experience from the skies to the ground. While airlines have upsold passengers on extras for years, what’s new is the hands-on approach to sourcing and marketing the content instead of using affiliate deals.”

Beijing orders Tencent to end exclusive music licensing deals in a first for the country. I am very reluctant to invest in Chinese companies precisely because of this.

Finance Chiefs Are Still Trying to Replace Excel With New Tools. Excel is a very powerful tool and we are not completely working without it at least in the next two decades. However, the over-reliance on Excel is damaging in a sense that it prevents companies from upgrading internal tools that can provide better collaboration and data interoperability. I am speaking from experience because that’s one of my personal frustrations at work.

How Gap’s new loyalty program ties together its multiple brands. I visited both Gap and Banana Republic recently. I couldn’t recall a nice experience in terms of finding out information about the rewards program. I suspect it is due to the staggered roll-out of the new rewards program and Omaha, Nebraska isn’t high on the priority list. Nonetheless, consolidating multiple rewards programs, making it simple for customer to understand and offering real values sound like music to my ear. Their offerings are still not best in class. For their sake, I hope they continue to upgrade the rewards benefits.

Reebok got the better of Nike 30 years ago but fell into oblivion. This is the story of how Rebook’s fall from grace happened. The article put a lot of emphasis on Adidas’ mismanagement of Reebook. That happens all the time. Executives promise the sun and moon in M&A, but failures are more common than many care to admit. I don’t know whether without Adidas, Reebok would have still been able to compete with Nike. That’s far from certain. Anyway, another business case study that many can draw lessons from.

Apple makes its M1 Mac case to enterprises. One of my bull cases for Apple is its potential in the enterprise market. Apple’s hardware is well-positioned to really attack this. Up to now, I don’t see a whole lot reported on its market share or Apple’s concrete strategy to go into this space. There is a lot of TAM to tap into here.

A nice profile piece on Bessemer Venture Partners. I like them because they seem very grounded, thoughtful and prudent with other people’s money. There are some firms that, in my opinion, tend to be too optimistic, to the point of being delusional in some deals. Plus, Bessemer publishes their investment memos that I like to read a lot. You can still be wildly successful while being different from the majority.

What I found interesting

Finland ends homelessness and provides shelter for all in need. Some food for thoughts for folks in America: is having the richest companies and individuals along side with grave inequality represented by a lot of homeless people better than a bit less wealth yet greater equality? As a reminder, Finland’s GDP Per Capita is higher than America’s

World’s cheapest energy storage will be an iron-air battery. The startup claimed that their revolutionary battery would cost only 1/10 as much as lithium batteries do. If that’s true, it will be huge.

Beneath Istanbul, Archaeologists Explore An Ancient City’s Byzantine Basements

What growing avocados in Sicily tells us about climate change and the future of food. Simply both fascinating and scary at the same time, if you ask me

Stats that may interest you

In 2020, craft brewers in the U.S produced around 23.1 million barrels, the lowest quantity in the last five years

Apple TV+ has 3% market share

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.

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

Apple TV+ has the highest ratings among streamers. Walmart vs Amazon. Netflix recorded slower growth but saw 2x growth in FCF

Apple TV+ has the highest IMDB ratings for content

According to a new study, content on Apple TV+, Apple’s exclusive streaming service, receives the highest average ratings on IMDB. There are a couple of caveats here: 1/ this is on average. One size cannot fit all in this streaming area. The study reveals that Apple TV+’s content ranks pretty low in some genres. Hence, if you are a connoisseur of Crime or Fantasy content, the streamer may not be your cup of tea. 2/ Apple TV+ has a significantly smaller library than other streams. As a result, the smaller sample may favor Apple’s streamer.

Focusing on content quality is a smart move from Apple. The likes of Disney+ or Netflix already have a lot of titles to offer viewers. It would take Apple either a long time or plenty off money to acquire the rights to stream titles from other producers. Even then, they still likely wouldn’t come out on top because the other heavyweights aren’t standing still to lose their market share. Plus, I don’t imagine Apple TV+ is a profit center for Apple. At $5/month and restricted to Apple devices or Roku, I don’t think Apple TV+ reaches the scale that enables them to raise prices yet. It is an auxiliary service that makes their bundle Apple One or their devices more attractive and sticky to consumers. Services like Apple Care or iCloud, and their hardware are the drivers of margin and profit. It doesn’t make sense for Apple to try to compete with Netflix on the number of titles while diluting investments on quality. The prospect of Apple TV+, with its much smaller subscriber base, beating Netflix on their own game doesn’t seem likely. Plus, focusing more on quality resonates more with the Apple brand.

Walmart vs Amazon

The battle of these two retail titans is exciting to watch. While Walmart has been trying to improve its 3rd party marketplace & ads platform and grow its fintech segment, Amazon has also had some developments on its own:

Walmart has the advantage of low-cost grocery, a category that is near and dear to every shopper, and a network of stores scattered around the country that can act as their fulfillment centers in addition to the actual dedicated ones. On the other hand, Amazon has a more mature online presence, 3rd party marketplace and ads business. It also has 200 million loyal and, in my opinion, profitable customers in their Prime program. For the past months, each company has tried to close the gap to the other. Walmart launched a Walmart+ service, their answer to Prime, while ramping up their marketplace, including the partnership with Shopify, and ads business. Meanwhile, Amazonzz has invested heavily in last-mile delivery and cashierless stores. Even though it’s tough to match the scale of Walmart in groceries, having smaller stores and no headcount expenses will definitely help Amazon drive down the prices.

Which retailer will come out on top remains to be seen. It’s exhilarating, though, to see each iconic firm expand its capabilities and go out of its comfort zone to stay competitive. If I were a business or strategy professor, this would be one of the cases I bring to classes.

Netflix recorded slower growth but saw 2x growth in FCF

The results of Netflix’s first quarter FY2021 were out today. Revenue stood at $7.2 billion, a 18% YoY growth, while operating income was almost $1.9 billion, up 44% YoY. The quarter closed with almost 208 million paid subscriptions, including 4 million in net additions compared to almost 16 million subscribers in net add a year ago. The company attributed the slow growth in subscribers to the pandemic and a weak slate of titles. While Netflix is still confident in the 2nd half of the fiscal year, it does forecast a relatively flat weekly global net adds till the end of the 2nd quarter.

Netflix's flat forecast in net subscriber adds till Q2 FY2021
Source: Netflix

While a slower subscriber growth isn’t good news to Netflix investors, it doesn’t tell the whole story. First of all, they may actually be right that the pandemic and having no hits this quarter had adverse effects. Second of all, Netflix raised their subscription prices a few months ago; which may also be another contributing factor, especially given the intense competition from other streaming services. HBO premiered two blockbusters: Godzilla vs Kong and The Snyder Cut. Disney Plus had their exclusive Wanda Vision and The Falcon & The Winter Soldier, among other titles.

Additionally and very importantly, Netflix increased its free cash flow by 200%, despite a stunted subscriber growth. The company’s free cash flow in Q1 2021 was $692 million, up from $162 from the same quarter a year ago. In the shareholder letter, Netflix was confident that they would be FCF neutral for FY2021 and that they had no plan to raise debt in the near future. More excitingly, they are beginning to buy back shares this quarter. For the Netflix bulls out there, it’s great news. The company spends $20 billion a year on content, yet it is on track to become FCF positive; which almost no other streamer can replicate. That’s the beauty of operating at the scale that Netflix does. Their content investment is a fixed cost. The more paid subscribers there are, the lower the unit cost for each subscriber will be and the higher margin Netflix can extract. However, for other streamers, they have to invest a lot in content to grow their subscriber base. Since their current pool isn’t big enough, they are likely operating in the red with negative cash flow like Netflix used to. The question then becomes: how long can those streamers sustain that loss while trying to match those billions that Netflix pours in content annually?

Yes, seeing their growth stunted this quarter isn’t great, but it’s just one piece of the puzzle. The FCF piece that Netflix announced today is, in my opinion, equally important. One quick look at notable news outlets that covered Netflix earnings showed one common theme: Netflix’s growth. I mean, it’s not wrong, but I don’t think their headlines tell the whole story

Coverage of Netflix's Q1 FY2021 earnings without mentioning the cash flow story

Weekly reading – 23rd January 2021

What I wrote last week

A few simple tips to save money that I have from personal experience

I wrote about the debate on whether social media should censor Trump

Business

Internal deliberations at Twitter over whether they should ban Trump

Checkout.com vs Adyen

If you aren’t too familiar with Fintech, this article is a good place to start

A piece on a16z and its media-savvy founder

Apple TV+ is said to have only 3% of the market in which Netflix still remains the leader

21% of Chime’s revenue per user as of June 2020 came from ATM fees for out-of-network withdrawals

Nintendo – capitalizing on nostalgia

A survey shows that Apple may have a problem with Apple TV+ churn on its hands

A profile of the CEO of Edwards Lifesciences

The Story of a Cap Table: Affirm

Technology

The Myth of The Infrastructure Phase. Such an interesting read on the development of applications and infrastructure

The insider story of PDFs

What I found interesting

A beautiful beautiful letter on living a life worth living

Nikkei Asia has a nice piece on Covid-19 as an opportunity for Vietnam, given how the country has masterfully managed the crisis so far

Why cats love catnips

Axios has an 8-part (till now) series of great reporting on Trump and his post-election madness

Review of The Banker and Defending Jacob

It has been a while since I took time on a weekend to watch some movies and series. I saw The Banker and Defending Jacob today on Apple TV+ and wanted to share a few thoughts

The Banker

The movie is about two black men who wanted to take down the racism and segregation in the real estate and banking industries in America several decades ago. By their entrepreneurship, determination and talent, they managed to own a sizable fortune from their real estate business in California. After the success, Bernard Garrett set his sight on helping black people in his hometown Texas access capital which could, in turn, change their life. To do so, Bernard and his partner Joe Morris and Matt Steiner bought a bank in Texas. Since having colored folks as owners of a bank threatened its existence, Bernard and Joe did their work behind the scene with Matt as the front man. They started to make loans to the black community, true to their mission. The entire operation was put in jeopardy by a jealous and racist minor owner who was the son of the previous owner. The trio were put in a congressional hearing chaired by a Senator with a racist agenda. They were offered immunity deals to say what they were asked to say or they could speak their mind and go to prison. Truth was spoken, immunity deal was granted and a revolutionary law was passed to make banking fairer.

Working at a bank, I have come across laws that require equal access to capital a few times. Everything we do from issuing credit cards to lending out money has to be legal. Even if we want to use an attribute provided by our partner to make targeting more efficient, the attribute has to be investigated by our Compliance to make sure that there is no discrimination. It’s tedious and bureaucratic, but it’s necessary. Watching this movie brought me a new level of appreciation for some of the banking laws.

I enjoyed the movie and the story it told.

Defending Jacob

This is a new series from Apple starring Chris Evans. It’s about a Deputy Attorney District in a county in Massachusetts named Andrew Barber. One day, a high school student who went to the same school as his son was found dead in a park two blocks from their home. The tight-knit community was on edge. Andrew was charged with leading the investigation. The dead student was stabbed to death. Later, the investigation uncovered that his son bought a knife two weeks prior to the murder and was seen bullied by the victim. Andrew was taken off the case and his family’s world was turned upside down.

Only three episodes of the series have been aired so far, but they have been pretty nice. The drama is getting more exciting by each episode. The plot was set up to reveal more explosive twists later. I enjoyed watching the actors playing the Barbers bring out the struggle that their family had to go through. I think Chris did a good job. It’s refreshing to see him outside of his iconic role as Captain America. I suspect his son was dead, but don’t mind waiting for a few episode to find out.

Disclaimer: I own Apple stocks in my portfolio

Apple’s multi-sided game

There were quite some surprises unveiled at Apple Event today:

  • Apple Arcade: $4.99/month for a whole family
  • Apple TV+: $4.99/month for a whole family and free if you buy a new iPhone, iPad, Apple TV or Mac
  • Price cuts for devices such as iPhone and Apple Watch Series 3

For a company notorious for ripping off consumers, a notoriety that they earn to a large extent, undercutting competitors and lowering prices for their high-end products are unusual. However, it may make sense in the game that Apple is playing.

Formerly relying on hardware, especially iPhones, for their revenue, Apple has been transitioning to be more of a service company. They have been pushing hard on the service part, including but not limited to Apple Pay, iCloud, Apple Card, Apple News+, Apple Arcade, Apple Care. However, to sell these services, they first need to find a way to put hardware into humans’ hands.

In return, hardware would be just boring pieces of metal without great user experience that comes from the operating system and ecosystem, including apps and services. There is no shortage of alternatives to expensive products that Apple offers. To really convince a consumer to dole out a significant amount, they need to present compelling reasons. Hence, the gradual updates to operating systems and a slew of services.

But Apple can’t do everything alone. They need partners. They need content partners such as publishers, game companies and producers as well as strategic partners like Goldman Sachs. These partners, I guess, are interested in the reach that Apple has through its installed base. By working with Apple, they hope to leverage the media coverage that Apple enjoys and get to many customers as quickly as possible.

By lowering entry prices for Arcade and offering TV+ on a very attractive term, I suspect that Apple wants to expand the subscriber base quickly from the existing user pool. The bigger the subscriber base, the more leverage Apple will have with content and strategic partners, whose future creations in turn will increase the appeal of Apple’s services.

By lowering hardware’s prices, there may as well be other reasons and I am so speculating here, Apple wants to lure non-Apple users and expand its user pool. It’s a two-pronged approach to grow the ecosystem.

It’s truly remarkable to me how a company this size can keep adapting to the changing landscape of the business environments to be competitive in a highly competitive industry. Some folks say Apple isn’t taking risks. But any strategic mistake by omission or commission may result in at least two years behind competitors and billions in market valuation. Others complain that the Cupertino-based company is no longer innovating. It’s tricky to tell if it’s completely true or false. But it’s worth remembering that Wearables & Accessories, including Watch and Airpods, generated $5.5 billion in revenue in 90 days last quarter while the main products still remain sticky to consumers.

As a student of business, I admire the company. No company is flawless, but it’s amazing what Apple has been able to do to navigate through competition and constantly changing business environments.

Disclaimer: I do own Apple stocks in my humbly small portfolio.