Weekly reading – 26th March 2022

Business

The 2022 iPhone SE. “There is a profound thoughtfulness and longevity to this design. Like an all-time great athlete, years past their prime, but still pulling their weight on the team, contributing something essential. This is backward compatibility Apple-style — not technical compatibility, but experiencecompatibility. The iPhone SE is the comfort iPhone”

‘Extremely awkward’: Bob Chapek and Bob Iger had a falling out, they rarely talk — and the rift looms over Disney’s future. I remember when Jobs passed away and Cook took over as the CEO, many thought it would mean a bleak future for Apple. Nothing could be further from the truth. As a consequence, even though I personally admire Iger and remain positively cautious about Chapek, what happened to Apple might be repeated for Disney. Yes, Chapek may not be a people’s leader and his promotion of Kareem puts too much power in the hands of his confidante. Yet, even some of his skeptics admit that Chapek is a skilled and determined operator. Perhaps, that’s what Disney needs. We’ll see at the end of FY2024.

Two-Minute Battery Changes Propel India’s Shift to E-Scooters. “Sagyarani, a 38-year-old e-shuttle driver for MetroRide, pulls up to one of startup Sun Mobility’s 14 automated orange-and-black booths, taps her authentication key to open a vacant compartment, inserts a drained battery and pulls out a fully powered pack. That means more hours on the road transporting commuters to metro stations, MetroRide’s main business. Another bonus: it costs just 50 rupees (67 cents) to swap out a single fully discharged battery, which is about half the price of 1 liter (¼ gallon) of gasoline. Swapping in India will be mainly used by the nation’s 1.5 million electric rickshaws that make up 83% of total EV sales. Because swappable batteries deliver a shorter range, they’re a better fit for the low-speed vehicles as opposed to sedans and SUVs, which need high-power batteries to deliver greater distance

European Lawmakers Reach Deal on Sweeping New Digital-Competition Law. “Widely known as the DMA, the legislation could affect many corners of the tech world. It is aimed broadly at limiting the ability of the biggest tech companies from taking advantage of their powerful presence in digital markets—including the app ecosystem, online shopping and online advertising. Provisions in the text, if agreed upon, would allow developers to make their apps available to iPhone users without going through Apple Inc.’s App Store and could limit how sites such as Alphabet Inc.’s Google and Amazon.com Inc. can rank their own products and services ahead of those offered by smaller competitors in search results.”

Other stuff I found interesting

A truly great site on iconic food packaging

An excellent profile of Mohammad Bin Salman (MBS). It’s utterly unthinkable to see how much power a man can have over a country in this day and age. Until you look at the rulers of Saudi Arabia. What is frightening is that some said that when, not if, he becomes a king, Crown Prince MBS will look like an angel.

Inside the Fight Over the Future of New York City’s Outdoor Dining. When I was in New York a few months ago, I was fascinated by the outdoor dining scenes of the city. Industry, entrepreneurship and authenticity. The Open Restaurants program has saved more than 100,000 jobs since June 2020. Evidence of how outdoor dining contributes economically to the city. Personally, I loved to visit some of those restaurants. However, there are downsides. The city can look messy and dirty, and the restaurant outdoor settings take up invaluable parking space that is already in far greater demand than supply can handle.

Stats

The U.S. online grocery market hit $8.7 billion for February

New car total sales are expected to hit 3,228,000 units in Q1 2022, according to J.D Power

“U.S. retail sales of plant-based foods grew 6.2% in 2021 over a record year of growth in 2020, bringing the total plant-based market value to an all-time high of $7.4 billion”

The average price for an Oscar commercial is about $1.71 million

Weekly reading – 19th March 2022

Business

Amazon’s Washington Strategy Wins Few New Friends in the Biden Era. One of the skills I admire in Satya Nadella and Tim Cook is that they manage the relationship with Uncle Sam very well. As unhinged and unpredictable as Trump was, he didn’t attack (much) Microsoft and Apple while being critical of Amazon. Even when a Democrat is in the White House, Amazon also has a rocky relationship with the US government. Now that Andy Jassy is in charge instead of the combative Jeff Bezos, will Amazon finally forge a cordial and productive bond with the White House and Congress?

Taiwan invests in next generation of talent with slew of chip schools. “Taiwan is racing to set up specialised “chip schools” that run year-round to train its next generation of semiconductor engineers and cement its dominance of the crucial industry. Taiwan’s government has partnered with leading chip companies to pay for these schools. The first four were established at top universities last year, each with a quota of about 100 master’s and PhD students, and another has been approved, the education ministry said.” Any country that is serious about their future should have a look at this. I am not saying that having such an initiative is universally applicable, but the consideration for such a strategic asset is. The more

An Oral History of Apple’s Infinite Loop. A very cool collection of Apple anecdotes. He has been gone for over a decade, but fans still love anecdotes about Steve Jobs. At least this fan does.

Discontent With Disney Over Bill Adds to Trouble for CEO Bob Chapek. As a Disney fan and shareholder, I don’t think it’s great in the long term for the company to lose creative and engineering talent for tax breaks. The war for talent is only going to get fierce and expensive from now. Those tax breaks from Florida will look small in the grand scheme of things. I also don’t support Chapek’s move to prioritize business and distribution personnel over creative folks. At Disney, creativity is in its DNA and what differentiates the company from competition. As a result, it should be nurtured.

Most Medical Debts to Be Removed From Consumers’ Credit Reports. While I understand that access to capital is very important, I don’t fully support this policy from credit bureaus. Consumers should know how much debt they have before they go out and borrow more. Otherwise, they’ll be leveraged up to their eyeballs and go bankrupt. Having medical debts reflected in credit reports is a deterrent. Removing it may create unwanted consequences. Financial firms may look at prospects without unaccounted medical debts as higher risks, but eventually they’ll use a wealth of data on their hands to come up with something to help them evaluate those risks.

Other stuff I find interesting

Face-to-face interaction enhances learning, innovation. “New Cornell psychology research finds that sitting face-to-face, rather than shoulder-to-shoulder, enhances learning and innovation – even when we’re learning complex physical skills that should be harder from that perspective. Across ages, test subjects performed better when they could observe not only an instructor’s hands but also their eyes, gaze and facial movements. The researchers propose that face-to-face interaction transmits valuable social information about goals and motivations in addition to visual information about the task.”

A futuristic McDonald’s in Australia is on the cutting edge of experiential retail.

Historical Redlining Is Associated with Present-Day Air Pollution Disparities in U.S. Cities. “Communities of color in the United States are systematically exposed to higher levels of air pollution. We explore here how redlining, a discriminatory mortgage appraisal practice from the 1930s by the federal Home Owners’ Loan Corporation (HOLC), relates to present-day intraurban air pollution disparities in 202 U.S. cities. Our findings illustrate how redlining, a nearly 80-year-old racially discriminatory policy, continues to shape systemic environmental exposure disparities in the United States.”

Matthew Klein on the Economic Fallout from the Russia-Ukraine War. A great podcast episode on Russia – Ukraine

Stats

As of February, retail gas prices in the U.S. were up 38% year-over-year, according to the U.S. Energy Information Administration

Battery Electric Vehicles made up 5.3% of all new models in Romania. In December 2021 alone, the mix hit 17%

3% of the funds invested in African startups between 2013 and 2021 went to female-led endeavors

Total volume was at its lowest level since 1985, with 11.75 million new cars registered in Europe

Apple’s next growth opportunity. Disney+ added more subscribers while raising prices. ESPN+ achieved its FY2024 target

Corporate & Commercial – Apple’s next growth opportunity

Apple has always been a household consumer brand. There are still areas that the company can explore in the consumer space to fuel growth such as the global availability of their services, next generation chips, the AR glass or the long waited yet mysterious Apple Car. I remain excited about Apple’s growth prospect as a consumer staple, but Apple may be more than that in the future. There are signs lately that Apple may make a push into the corporate segment. First, it launched Apple Business Essentials, a device management service for small businesses with fewer than 500 employees. The program is still in early days, but the company already said that thousands of small businesses already participated in the program. That’s Apple’s style: choose to come to the market when a service or product is ready and deploy consistent incrementalism over time. Remember how some ridiculed their introduction of Wearables, which is now their 3rd largest business? And if they manage to build that muscle and processes to deal with small businesses, there is no reason not to think that they can expand their market and go further upstream.

Then on the earnings call, Luca Maestri (Apple’s CFO) revealed this anecdote:

Shopify, for example, is upgrading its entire global workforce to M1-powered MacBook Pro and MacBook Air. By standardizing on M1 Max, Shopify continues its commitment to providing the best tools to help its employees work productively and securely from anywhere. And Deloitte Consulting is expanding the deployment of the Mac Employee Choice program, including offering the new M1 MacBook Pro to empower their professionals to choose devices that work best for them in delivering consulting services.

Source: fool.com

I feel that M1 is the last puzzle piece that Apple needed to start making moves in the corporate market. The chip makes Apple devices more powerful and efficient, exactly what the white-collar folks like myself want and opposite of what we are used to (like all those bulky and burning Dell computers). As employees like Apple’s products, companies are more incentivized to offer such products as perks to retain talent; which plays into Apple’s hands. In the past, whether Apple’s products were the clear winners might be up for debate, but the introduction of their in-house chip put the question to rest.

This week, Apple revealed that future iOS updates would let merchants accept transactions with just a tap on their iPhones. The value chain analysis or how exactly this would benefit Apple are still question marks. I suspect Apple will take a small cut on every transaction like they do with Apple Pay transactions. Also, if merchants rely on an iPhone as a card reader, Apple Business Essentials will suddenly become an appeal so that they can manage their devices properly. These are just two early signs of what Apple can put together for businesses. I am eager to learn what they have in store because I am almost confident that they have a roadmap in mind already.

Disney+ and ESPN+ added more subscribers while raising prices. ESPN+ achieved its FY2024 target

The first quarter of FY2022 was a good one for Disney as the company continued to add more subscribers to its flagship streamer Disney+ outside of India and ESPN+ while increasing Average Revenue Per User (ARPU). The testament to the strength of a product or service lies in the ability to retain customers while raising prices. In that sense, Disney+ has so far defied critics and proven its mettle, showing that its streaming services are capable of challenging anyone else in this highly competitive market. The iconic company set the long term target of 230-260 million Disney+ subscribers by the end of FY2024. There are 8 more quarters to go. To attain that target, Disney needs to deliver a quarterly net add of at least 13 million subscribers. The company is on the right track to do so. In fact, the management said that even without the rights to Indian Premier League, the nation’s cricket competition that is arguably the biggest acquisition tool in the Indian market, it is still confident of meeting the FY2024 guide.

If you look at India, we’re certainly going to try to extend our rights on the IPL. But we’revery confident that even if we were not to go ahead and win that auction that we would still be able to achieve our 230 million to260 million. So it’s an important component for us around the world. Obviously, really important in India, but not critical to us achieving the 230 million to 260 million number that we’ve guided to.

Source: Walt Disney Q1 FY2022 Earnings Call

While Disney+ added more subscribers in the US and Canada than Netflix in the last few quarters, I don’t think that any comparison can be fair. The two streamers are operating at a different scale and life stages. Netflix is much more established and has a much bigger subscriber base. Hence, even though it added fewer customers, we shouldn’t draw any conclusion yet on either.

ESPN+ already achieved the FY2024 guide of 20-30 million subscribers. Its tally at the end of Q1 FY2022 is already 21.4 million. I am sure with an imminent international expansion and addition of rights to more sports, ESPN+ will attain the higher end of the guide range, if not exceed it.

Disney+ North America net add subscribers and ARPU
Disney+ excluding Hotstar net add subscribers and ARPU
ESPN+ net add subscribers and ARPU

VRIO – A useful strategy framework to look at a business

If you are looking for a strategy framework to think about a business’ competitive advantages, I recommend VRIO.

The name is an abbreviation of Valuable, Rare, Inimitable and Organized. Essentially, if a firm’s capability or resource is Valuable, Rare and Inimitable, and the firm itself is Organized, it has a sustained competitive advantage. The more sustained competitive advantages a firm has, the more robust its business model is and the more likely it is to succeed. Let’s take a look at a few real-life examples to see how applicable this framework is:

Apple

Apple is arguably the best in the world in combining hardware and software to produce great consumer products. Such a capability is absolutely valuable and rare because we don’t often see that in the market. Samsung or Huawei can make good hardware, but they don’t put hardware and software to harmonious use like Apple does. Google owns Android and is excellent at software, but they aren’t known for their hardware prowess. The fact that some of the biggest companies in the world haven’t been able to copy Apple means that this capability is hard to imitate. Plus, Apple, since Steve Jobs return, has been well-organized to leverage this capability with one P&L to promote singular objectives, the sway that the Industrial Design has or the new multi-billion dollar campus to encourage creativity and collaboration. Lately, Apple has bolstered this competitive advantage further with its own chip M1 and the rumored initiative to design its own 5G cellular chip. It’s precisely the ability to combine humanity, hardware and software that makes Apple products astounding success and itself the most valuable company (as of this writing).

Another advantage that Apple possesses is its world-class supply chain. Not many companies can operate a complex supply network that spans the world and have bargaining power over even powerful players like Foxconn, TSMC or Intel. Imagine that you have to work with suppliers in different countries for different parts, navigate through local regulations, coordinate delivery and transportation, and negotiate pricing while protecting the confidentiality of products. It’s monumentally challenging, but on the other hand, it’s valuable, rare and hard to imitate. Any new rival will have to spend years to put up the same network, and even then, it likely doesn’t have the power of Apple. Additionally, is Apple organized to leverage this capability? Tim Cook, the current CEO, is a supply chain wizard. The company COO, Jeff Williams, is also an Operations guy. The company is one of a few from the West to have a productive relationship with China and its government, despite all the political tension between the U.S and China. This type of relationship can’t be replicated in a short amount of time, if it can be replicated at all. Hence, supply chain is another sustained competitive advantage that Apple has to offer.

Aldi

Aldi is a hard-discounter chain that originates from Germany and came to the U.S in 1976. The former CEO and President of Walmart, Greg Foran, labeled Aldi as “good and fierce”. What makes Aldi so? The discounter’s sustained competitive advantage lies in its long-standing culture and commitment to cut costs and pass on savings to shoppers. Here are a few practices that Aldi employs:

On average, an Aldi store’s size is about 12,000 square feet, compared to Walmart’s 178,000 and Costco’s 145,000 square feet. The smaller size helps drive down either leasing expense (if the land is leased) or depreciation (if the land is owned), as well as energy costs. Regarding SKUs, an Aldi store, on average, carries 1,400 items compared to 40,000 items by a traditional supermarket. The much smaller store size and more limited item selection lead to fewer staff required. An Aldi store usually has only 3-5 employees, a significantly smaller number compared to how many employees are present at a store like Walmart or Costco. The limited item selection enables Aldi to focus on its offerings and negotiate favorable deals with suppliers to keep costs and prices low. Another benefit is that a limited assortment doesn’t require complex marketing promotions, meaning that there will be no cost on marketing materials and labor.

Walking into an Aldi store, you won’t notice many decorations. It looks like an ordinary, no-fancy store and it’s by design to keep costs low. At Aldi stores, there is no free bag. Customers are encouraged to bring their own bags. Carts can only be used with a quarter coin. Customers retrieve the quarter upon returning a cart. This policy has long been part of Aldi’s signature operations. Additionally, customers have to bag their own groceries. A cashier will scan items and put them in a cart, but shoppers will have to take it from there. It speeds up the checkout process, increases efficiency and reduces the need for additional staff. As far as I know, there is no self-checkout.

About 90% of Aldi’s items are private labels. This private label centric approach allows Aldi total control over its selection and reduces the cost as well as complexity that comes with national brands. Private labels used to be unpopular among shoppers due to their cheap image. However, consumer preferences have changed. Astute shoppers, especially millennials, now have a much more favorable view on private labels because they are cheap and provide best value for money. According to Bain, 85% of American shoppers are open to buying private labels.

Source: Onepercentamonth

It’s certainly valuable to pass on savings to shoppers. While the practices themselves may not be rare, the commitment and the culture that enables consistent execution are. The frugal approach that empowers all the little things mentioned above has been nurtured and well-preserved since 1946 when the parent brand was founded in Germany. The only rival that has a similar mentality is Walmart. But the two chains differ in strategies. While Walmart has its hands in numerous cookie jars, Aldi’s bread and butter in the U.S is groceries in small stores with a small number of SKUs. In that segment of the market, I don’t see anyone with Aldi’s expertise and culture. As you can notice, it’s easy to copy a tangible element or an expertise of a business, but it’s much more difficult to replicate the intangibles like culture. Lastly, is Aldi organized? The brand is still one of the best, if not the best, hard discounters in various markets. In the U.S, it has been growing steadily since 1976 and becoming more popular among shoppers. So, I’ll say: yes, it’s organized!

Disney

Disney’s competitive advantage comes from its ability to consistently create excellent content loved by millions around the world. Any production studio can come up with a great movie or show once in a while. Disney is among a handful that can do it consistently. Take Spiderman: No Way Home as an example. It’s on track to net over $240 million in the first opening weekend while being the 27th Marvel movie since Iron Man in 2008. Over the last decade, Disney has dominated the list of highest grossing movies with hit after hit like Avengers: End Game, Captain Marvel, Infinitive War, Black Panther or Star Wars: The Force Awakens. While HBO is known for its quality outputs, even the famed studio isn’t as prolific as Disney. If you think about it, it’s all but nearly impossible to achieve what Disney has done, especially given that it owns the IPs such as Star Wars and Marvel franchise for eternity. Is it guaranteed to succeed long in the future? No. But Disney is more likely than any of its rivals to replicate its previous successes.

Source: Wikipedia

Another competitive advantage that this iconic brand has is its theme parks. Disney’s theme parks attract thousands of visitors around the world every year. As an important source of revenue and margin for the company, and a place for fans to connect with iconic movie figures, these theme parks are certainly valuable. However, they are not easy to create. Any company can pour millions of dollars into building and operating a park, but would they have the brand equity that Disney has with consumers around the world? Would they be able to lure enough visitors to make their park a financial success? To cultivate a brand or a cult like Disney does, a challenger needs to put out iconic content and characters year after year. That in and of itself is a monumental challenge that can’t be done in a few years’ time, if it can be done at all.

In short, VRIO is by no means the only framework to evaluate a business’ strength. We also have Porter’s Five Forces or Value Chain Analysis, just to name a couple. But VRIO is a very useful tool in analyzing a business’ competitive advantages and whether the business is great at anything it does. It’s one of my go-to tools when looking at a firm, as I demonstrated above. Hope this has been helpful for you.

Disclosure: I am long Apple and Disney’s shares.

Weekly reading – 16th October 2021

What I wrote last week

Cardless – The startup behind the Boston Celtics, Manchester United and Cleveland Cavaliers credit cards

The virtual tour of Son Doong Cave by National Geographic

Good reads on Business

Semi-Annual Letter to Partners by the DMZ Partners Investment Management. It contains some great nuggets of wisdom with regard to investment and business

Next Act for Apple Veteran Ron Johnson Is Taking Home-Delivery Startup Public. Ron Johnson’s story is proof that even established names can fail. After making his name at Apple, you can argue that he failed at J.C Penney. Now he is working on another startup poised to go public via SPAC. I have to admit, though, that his startup doesn’t sound really exciting or appealing to me.

Bob Iger’s Long Goodbye. “The thing about Hollywood is, you can behave badly, you can be rude, you can make duds, but the thing you cannot do is fuck with people’s money,” says a producer with business at Disney. “You just don’t do that and hide behind technology as the reason why.” It’s really hard to come to a conclusion on whether Chapek is the right person for the job. In his defense, he was dealt with a very bad hand: his predecessor is one of the best CEOs the world has ever seen and his reign started with Covid-19. However, I am not pleased with his handling of the legal scuffle with Scarlett Johansson. That, along with the departures of key creative executives, shows that people’s skepticism of how he works with Hollywood is not entirely imaginary.

Disney’s shift to streaming puts ESPN in awkward position of clinging to the past. “ESPN probably won’t consider a direct-to-consumer service until the pay-TV bundle falls below 50 million U.S. households, according to people familiar with the company’s plans. Disney makes more money from cable subscribers than any other company, and that’s solely because of ESPN. ESPN and sister network ESPN2 charge nearly $10 per month combined, according to research firm Kagan, a unit of S&P Global Market Intelligence. The reverse is true for ESPN. Swapping an ESPN subscriber for an ESPN+ customer, who contributes average revenue of less than $5 per month, is a significant loss for Disney. ESPN+ is a streaming service with limited content.”

The Nasty Logistics of Returning Your Too-Small Pants. “The average brick-and-mortar store has a return rate in the single digits, but online, the average rate is somewhere between 15 and 30 percent. That kind of fraud accounts for 5 to 10 percent of returns. Many retailers don’t allow any opened product to be resold as new. Brick-and-mortar stores have sometimes skirted that policy; products that are returned directly to the place where they were sold can be deemed close enough to new and sold again. But even if mailed-in products come back in pristine, unused condition—say, because you ordered two sizes of the same bra and the first one you tried on fit fine—the odds that things returned to a sorting facility will simply be transferred to that business’s inventory aren’t great, and in some cases, they’re virtually zero.”

Amazon copied products and rigged search results to promote its own brands, documents show. “The documents reveal how Amazon’s private-brands team in India secretly exploited internal data from Amazon.in to copy products sold by other companies, and then offered them on its platform. The employees also stoked sales of Amazon private-brand products by rigging Amazon’s search results so that the company’s products would appear, as one 2016 strategy report for India put it, “in the first 2 or three … search results” when customers were shopping on Amazon.in.” The fact that they mine sellers’ data and offer their own private labels isn’t new in the retail world. What I suspect will get Amazon into trouble with lawmakers is the rigging of search results.

EA Sports Is Planning for a FIFA Without FIFA. “Sales of the game, which releases an updated edition every year, have surpassed $20 billion over the past two decades for its California-based maker, Electronic Arts. But FIFA has cashed in as well: Its licensing agreement has grown to become the organization’s single-most valuable commercial agreement, now worth about $150 million per year.”

All That Zaz: With Warner Bros. Discovery Merger, David Zaslav Is Angling to Become America’s King of Content. “I asked him before he had to jump off our Zoom for a parade of meetings with producers and agents and talent and other Hollywood folk. Is there yet another megadeal up his sleeve? Will Warner Bros. Discovery need to get bigger still? “I think this deal will be the first sentence of my obituary,” he said, “that Discovery merged into Warner.” And the second sentence? “It soared.”

After a year of missteps, Ikea’s e-commerce business appears to be heading in the right direction. You may think that retailers naturally realize the value of eCommerce and the role that physical stores can play in the fulfillment game. In reality, it takes a once-in-a-generation pandemic for retailers to come to terms with this point. IKEA is one of them. As big and iconic as they are

Other interesting stuff

This 24-year-old dropped out of Columbia to build a $140 million underwear brand. Another example of the American dream right there

Love, Hope, and Worry in Drought-Ridden Page, Arizona

GreenForges digs deep to farm underground. ““I stumbled upon a paper that was analyzing how much food production capacity can we do in cities using rooftop greenhouses,” he said. “It’s a relatively low number; we’re talking 2 to 5% range for the cities of 2050. No one was asking the question, ‘Can we grow underground?’”.

Stats

As of October 2021, only 5% of Twitch users made more than $1,000 in 2021

Thailand has 28 million daily digital transactions as of October 2021, up from 7 million in 2019 and 14.5 million in 2020

“There are over 50 million retirees in the United States and, by 2035, there will be 72 million retirees”

One single mobile device infected with malware costs an organization an average of nearly $10,000, per Apple.

Weekly reading – 7/17/2021

What I wrote last week

A strong debut weekend of Black Widow highlights Disney’s competitiveness

Business

The Verge did a great comparison of smart trackers from Apple, Samsung and Tile. Tile is really in a bind here. Its products are not substantially better than the others, to the extent that can justify the inferior network of trackers that Apple and Samsung can boast. Unfortunately, that’s the one thing that makes these trackers valuable in the first place

Facebook Users Said No to Tracking. Now Advertisers are Panicking. There seems to be a genuine angst from developers and advertisers over Apps Transparency Tracking (ATT). The thing is that when it comes to tracking, the interests of developers and consumers aren’t necessarily aligned. In that case, Apple has to pick a side and it decided to side with consumers; which is an understandable decision for two reasons: 1/ it’s what Apple has always been about and 2/ Consumers are ultimately their source of income and profit. Sure enough, it’s in Apple’s interest to have a great relationship with developers. But when it comes to the list of top reasons why Apple exists, I don’t think assisting all developers for free is anywhere near the top. The whole situation seems like when oil companies complain about governments’ policies that curb oil extraction in order to protect everyone else.

Inside Facebook’s Data Wars. When you allow misinformation to spread frictionlessly, it’s kinda hard to convince others that you are not an echo chamber of misinformation

Dara Khosrowshahi, Dad of Silicon Valley

Profile of Melanie Perkins, Co-founder and CEO of Canva

What I found interesting

Lewis Hamilton: ‘Everything I’d suppressed came up – I had to speak out’

Is a Graduate Degree Worth the Debt? Check It Here. The debate over whether a university degree is worth the financial investment is very nuanced and it’s not just about the money. However, it’s undeniable that what one can learn from the Internet for much less money increasingly puts in the spotlight the high tuition fees and all the nonsensical charges that schools levy on students

Alcohol Use Linked To Over 740,000 Cancer Cases Last Year, New Study Says

Stats that may interest you

Since 1928, every S&P500’s bull market cycle lasted more than 1,100 days on average while that of a bear market cycle averaged 207 days

Engineers in Japan reached the new record for Internet speed at 319 Terabits per second, two times faster than the previous record

Edge_Retail_Insight-top_global_food_retailers-channels.png
Source: Supermarketnews

A strong opening weekend for Black Widow highlighted Disney’s competitiveness

In a rare move, The Walt Disney Company disclosed some details around revenue and profit made from streaming. Per Variety:

Disney and Marvel’s superhero adventure “Black Widow” captured a massive $80 million in its first weekend, crushing the benchmark for the biggest box office debut since the pandemic. The film, starring Scarlett Johansson, is the first from the Marvel Cinematic Universe to open simultaneously in movie theaters and on Disney Plus, where subscribers can rent “Black Widow” for an extra $30. Disney reported that “Black Widow” generated more than $60 million “in Disney Plus Premier Access consumer spend globally,” marking the rare occasion in which a studio disclosed the profits made from streaming.

Directed by Cate Shortland, “Black Widow” collected an additional $78 million from 46 international territories, boosting its global box office haul to an impressive $158 million. Combined with Disney Plus numbers, the final weekend figure sits at $215 million. Curbing overall ticket sales, however, is the fact that “Black Widow” still doesn’t have a release date in China, which is an all-important moviegoing market for the Marvel franchise.

A few things that jumped out to me with this report. First, Disney continues to show the ability to tell appealing stories to a wide audience. Granted, not everybody will enjoy their stories, but the revenue numbers don’t like. They have crushed revenue expectations in the past when the majority of movies that crossed $1 billion in revenue came from the studio and Endgame is still the top two successful movie of all time. Netting $215 million in the first weekend without China when many markets are still dealing with Covid-19, especially the Delta variant, is a great sign in my book.

Second, Disney has a unique ability to be flexible with how they introduce their movies. All the series such as Loki, Wanda Vision or The Falcon & Winter Soldier are exclusive on Disney+ and that makes sense. For the movies, they can reach the audience in different ways. Movies can be exclusive on Disney+ for free to all subscribers or to Premier Access buyers first and to all subscribers after a few weeks. Disney can choose to release movies in theaters first and then on Disney+. Or they can release it in theaters and on Disney+ with Premier Access; which is exactly what they did with Black Widow. The flexibility allows the company to react to the changing environment caused by Covid. Plus, it’s a great tool to maximize revenue and profit. Movie theaters will bring in nice revenue, but whatever money Disney generates from Premier Access is pure profit.

This unique flexibility is a competitive advantage that none of Disney’s competitors can copy. To convince people to shell out another $30 after already paying a membership, a streamer needs a strong brand and IP. Disney has that. Does Netflix have any movie that could do the same? I don’t think so. Even if a streamer has the necessary IP, does it have all the other ingredients needed t o pull the feat off? Like, if the streamer has a big enough subscriber base to even move the needle? Or does it have the relationship with theaters to negotiate a deal like Disney did? I think other streamers will look at today’s announcement from Disney with interest and try to explore the possibility of copying the model. So I will look forward to see how they can pull it off.

In the last earnings call, Disney reported that they had about 104 million Disney+ subscribers with a third coming from Hotstar in India. Hotstar subscribers pay much less for a Disney+ plan, hence it drags the whole streamer ARPU down. What’s interesting in this case is that Disney+ Premier Access is not available in India. News outlets such as Yahoo reported that the feature was not available in India. My friend from India confirmed it too. Given that Premier Access costs more or less $30 in every available market, $60 million in revenue from the feature means that around 2 million subscribers or around 1-2% of Disney+ subscriber base paid for early access to Black Widow.

Netflix bulls will keep pounding on the big lead that Netflix has over other streamers and, as a result, the cost advantage. That’s true. But what Disney shows is that there is an alternative way to succeed. Disney doesn’t have yet the subscriber base like Netflix has. But it has other unique assets: 1/ A dedicated fanbase to its IPs; 2/ The flexibility to make money from other channels, not just its streaming service; 3/ Its theme park complements nicely its Direct-To-Consumer segment. When you generate more money per movie than your competitors, does it matter whether it comes from your subscribers? That’s not to say Disney can neglect the task of increasing its customer base. It’s important that Disney can catch up to Netflix on this front and please investors in the short term. But it’s even better to introduce Disney+ at a low price in many markets to attract audience while making money from theaters and Premier Access. So far, I haven’t seen another company with this model.

Disclosure: I have a position on Disney and Netflix.

Take-aways from the latest interview of Disney CEO

Bob Chapek, the CEO of Walt Disney, attended Credit Suisse 23rd Annual Communications Conference and had some interesting comments on the business. If you are interested in the company or its competitors, it’s really worth a read. Here are a few highlights.

In response to the interviewer’s question on the investments on the experience side in the next 5 years, Bob’s answer was, as follows:

Sure. Sure. Well, we’ve got ambitious plans to expand our business. I had just mentioned Avengers Campus a second ago, and we’re encouraged by the great response we have there, but we’re not stopping there because, as you know, we’ve been undergoing a massive transformation of our Epcot park at Walt Disney World in Orlando. And we’ve got a Ratatouille attraction that we’re bringing in that first premiered in France. We’ve got a new nighttime show Harmonious that will be on the water there at Epcot, and it will be a huge guest pleaser. And then we’ve got our Guardians of the Galaxy: Cosmic Rewind attraction or coaster that will give us our ability to bring that whole Marvel franchise into the park. Internationally, we’re thrilled to bring Zootopia into Shanghai Disney Resort. You mentioned Shanghai.

That’s obviously a property that did extraordinarily well in the box office when Zootopia came out. So that will be a big hit in Shanghai. We’ve got Frozen installations coming into Hong Kong Disneyland. At Disneyland Paris, we’ve got the [indiscernible] of its own Avengers Campus taking off from where Anaheim has. It just recently launched Avengers Campus, and we’ve also got the Art of Marvel Hotel that we’re putting in. We’re installing Tokyo Disney Resort. We’ve got the 8-themed port over at Tokyo DisneySea.

We’ve got 2 new hotels and attractions going in for Frozen, Tangled and Peter Pan. And then we’ve got 3 new ships and a second island destination. So we certainly have a plethora of new things coming, and that’s really mining all the work that we had done prior to the pandemic and kept working on during the pandemic so that we would not have any sort of glitch in our supply chain of new attractions and experiences for our guests, so we can keep that growth engine of parks going.

Source: Credit Suisse 23rd Annual Communications Conference

That’s an impressive pipeline of investments both in depth and breadth. The company has different types of physical attractions under different brands and themes ranging from hotels, resorts to cruise lines and theme parks, from Frozen, Peter Pan to Disney & Marvel. Despite being badly hit by the pandemic, Disney’s traditional cash cow, their Parks business, is likely going to make up for lost time & money, now that folks are increasingly vaccinated and restrictions are lifted. These assets are difficult to replicate. First of all, they are expensive. Any company that wants to emulate Disney needs to ready their check books for a huge sum of money for initial constructions and yearly maintenance. Second of all, Disney competitors need to also build up a library of themes & characters that relate to consumers and entice them to visit the physical attractions. Disney has spent decades of creating, marketing and distributing content. Their brand name is known and loved by generations of consumers. Even if a competitor has the required resources to invest in content, those resources cannot buy the timeless reputation and name that Disney has.

Netflix is trying to take a page from Disney’s book. It’s building Netflix Shop where merchandise related to their originals is sold. This is the first piece of the puzzle. Netflix is popular among viewers around the world and it has some great originals. Hence, it makes sense for the streaming service to start making inroads into the retail side. However, having an online shop is very different from building giant physical attractions that represent huge fixed costs. It will take a lot more from Netflix to build an empire like Disney’s, but everything has to start somewhere.

Second, when asked about how much IP is there to mine, Bob Chapek had this to say:

Well, I’ve always learned not to underestimate our creative teams, particularly our Marvel creative teams. We’ve got 8,000 characters that we have to mine. And you say, well, 8,000 characters, who knows what these 8,000 characters are. But remember that all of our Avengers, for example, our Avengers characters, when we made the acquisition, weren’t exactly household names. Take Loki, for example. Loki was the most watched season premier ever on Disney+ during its opening week. And no one knew who Loki was even when we got started on this journey on Marvel. No one knew who Iron Man was or Wanda or Vision or Falcon or the Winter Soldier. Black Widow, Shang-Chi, nobody knew who these characters were.

Source: Credit Suisse 23rd Annual Communications Conference

I didn’t grow up reading Marvel comics. Years ago, when characters like The Hulk, Iron Man, Thor or Captain America debuted, I barely knew them, yet they are now some of my favorite. I suspect that many casual viewers will first get to know the likes of Shang Chi and others among 8,000 characters from movies or series by Disney. The ability to build characters and tell engaging stories, especially interconnected ones, over a long period of time is a creative competitive advantage that is hard to match. The last 12 years from the first Iron Man movie to End Game is evidence of such an enduring output of creativity. Does it guarantee future success and repeat of the past? No. But it’s much more assuring than records of many competitors.

Next, when the interviewer asked whether Disney would add an ads-supported plan to Disney+, Bob ruled that possibility out at least in the near future.

Yes. We’re always reevaluating how we go to market across the world, but we’ve got no such plans now to do that. We’re happy with the models that we’ve got. But again, we won’t limit ourselves and say no to anything. But right now, we have no such plans for that.

I support this position by Disney. The flagship streamer, Disney+, is already on the cheap end among streamers with the latest reporting ARPU standing at $3.99. The addition of an ads-supported plan would like drive down ARPU even more. Plus, nobody likes to have their streaming experience tainted with ads. Netflix goes to great lengths and invests a lot of resources to make sure that their viewers have the best streaming experience possible on their platform. Disney is wise to do the same if it hopes to compete with its rival. If the company wants to make money from ads, it has its own media channels to do so.

On what “new content on Disney+ every week” means:

Yes. Our plan is to do — hit that cadence this year in terms of a new product every week. And what we mean by that is a new movie or a series, meaning, a new production or library add every week. And that’s not counting new episodes, if you will, but does count new seasons. So we count new seasons. We don’t count new episodes in that. And something new can be a new movie or a new piece of content or something new added to the library. So that’s how we’re defining that. And that’s the plan right now.

Because Disney+ subscriber base is sufficiently big now, it enables the company to spread the fixed content investments across more than 103 million viewers, giving Disney a cost advantage over other streamers, except Netflix. Additionally, new content helps the company acquire more subscribers who will, in turn, add to the economics advantage mentioned above. What I am unclear about is whether a new weekly content is purely originals or whether it includes licensed IP. If it’s the former, it will be great news for Disney stock bulls, a gift to subscribers and ominous signal to competitors.

Last but not least, Bob Chapek touched upon the impact of price increases on churn:

Yes. In terms of, I guess, an objective way to look at the price value relationship, the growth rate that we’ve experienced on Disney+ sort of stands out as the headline there. But you’re right, we did launch at a very attractive price value opening point. And the first price point — or our first price increase that you mentioned in the first 16 months happened recently, and we’ve seen no significantly higher churn as a result of that. In Europe, as a matter of fact, we took a price increase twice as high as we took domestically more or less. And we — that was with — commensurate with the integration of the Star brand as the sixth brand tile. But our churn actually improved, right? So we took an even higher price increase and our churn improved because we added more content. And I think that investment in the content at attractive price point gets you strong retention, and strong retention, obviously, is one of the key factors towards overall platform growth. And — but that doesn’t mean that in the future as we continue to add more and more great content that we wouldn’t necessarily reflect that in the value that we add and then price it accordingly.

While it’s encouraging to see the current price inelasticity of Disney+, it’s equally important to understand that we don’t have a lot of context here. Disney+ had a low price at launch and even a 3-year bundle at one point. Because the starting point was low and the increase here is not significant in absolute ($1 in the US.), even though customer reception towards the latest price increase was positive, it doesn’t guarantee the same outcome for the next raise. They could plow millions of dollars into content, raise prices yet get spurned by consumers. Furthermore, since we don’t have information on the previous churn, it’s tough to conclude whether the current churn is good. Yes, there was an improvement, but for all I know, it could be upgraded from “disastrous” to “concerning”.

In short, Disney has a lot of great assets and great things going on for them. As the world is gradually opening up with an increasing vaccination rate, it will turbocharge the recovery of a business whose cash cow was terribly affected. On the streaming side, the pandemic was a boost in what I consider largely a two-horse race between Disney and Netflix. Each company has its won advantages and strengths. It’ll be super interesting to see how the market will be in the near future.

Weekly reading – 22nd May 2021

What I wrote last week

I gave examples of how prices on Amazon can be much higher than what you can find at retailers

A couple of great clips about soy sauce and its history

A review of Disney’s Q2 FY2021 results

My thoughts on Paypal

Business

A Moneyball Experiment in English Soccer’s Second Tier. Although people are quick to point out that Billy didn’t win a title with his Money Ball method, his team did improve within his limited resources. Barnsley will unlikely win any title, especially the Premier League. However, as long as the team makes it to the top tier and earns more money by just showing up, it should be an astounding success itself.

Why former Google ads boss Sridhar Ramaswamy is building an ad-free search engine. A pretty interesting interview. I wonder what would make such a search engine attractive enough that people would pay to use it. I mean, DuckDuckGo is pretty great and it is privacy-focused. And it’s free.

Panera Bread’s new design transforms it into a neighborhood bakery in a bid to build loyalty. Retailers have to focus on delivering experience. The physical goods are a must, but it’s just part of the puzzle.

What I find interesting

Khmer Temple-Hopping Motorbike Loop | Tra Vinh. Vietnam has a lot to offer in terms of tourism. I’d say that instead of frustrating yourself in touristy places, you should head to destinations like Tra Vinh, which have their own charm, beauty and history. Personally, I prefer Tra Vinh to cities like Nha Trang or Mui Ne.

Hyundai Nexo breaks world record for longest distance travelled in a FCEV. Even though a long distance was achieved with one tank of hydrogen fuel, eventually these cars still need to refuel. Hence, the challenge of propping up fuel stations in popular areas still remains. Unless that is accomplished, there is still a long way to go for fuel-cell-electric vehicles. Though the way got a tiny bit shorter.

Censorship, Surveillance and Profits: A Hard Bargain for Apple in China. Not only is China a $50 billion market for Apple, but it also houses its main irreplaceable yet supply chain. Even a local billionaire hero like Jack Ma disappeared over night and lost his influence after angering the government and President Xi. What chance does Apple have to be anything different? If Apple still wants to do business in China, it has no choice but to do everything it can to balance between appeasing Xi and protecting its customers as well as principles. Some may say that Apple could have pulled out of the country like Google. Well, that’s Google principle. Tim Cook’s principle is to show up because “nothing changes from being on the sideline”. You can disagree with his or Apple’s principle, but you can’t just change it. Additionally, as a Vietnamese, I don’t think it would be much better to relocate all the supply chain to my country. The story would be more of the same. Well, in many countries, it would still be more of the same.

Google Workspace got a huge upgrade. At first glance, the upgrade looks so interesting.

The 1,400-year-old invention Peru is reviving. In the age of technology when our societies are more technologically advanced than ever, ancient techniques tested over the years continue to be effective.

Apple previews powerful software updates designed for people with disabilities

You may soon be able to buy pre-IPO stocks

Stats that may interest you

Ethereum will use at least ~99.95% less energy post merge

There are 3 billion active Android devices

The average age of bridges in America is 44 years

Review of Walt Disney’s Q2 FY2021 results

There are two main stories regarding Disney: Disney+ as well as other streaming services and their non-streaming segment.

As more and more folks in the US are vaccinated and the CDC relaxed its guidelines, Disney reopened its theme parks and resorts in the last quarter. Traditionally, this segment is the key source of Disney’s profit, but was severely hit by Covid-19. Compared to the prior year quarter, Q2 FY2021 saw revenue from Parks, Resorts, Cruise and Merchandise drop by more than 50%.

Figure 1 – Breakdown of Disney’s Q2 FY2021 Revenue – Source: Disney

Hence, having their physical attractions open is definitely good news to investors. It’s also a testament to the resiliency and health of the business. Its cash cow was hit very hard by the catastrophe that is Covid-19, yet it pivoted successfully to Direct-to-Consumer while waiting for better days to come. In addition, Disney is going to launch an all-new Avengers campus in California on June 4 and allow bookings for its new cruise ship Disney Wish starting May 27th. The Avengers campus, I suspect, will be a big hit to consumers. Thousands, if not millions, love the 10 year story arc with about 23 Marvel movies. As the original cast such as Chris Evans or Robert Downey Jr is more or less out of the picture and the new generation of superheroes are slowly making their way to the scene, fans will cherish a chance to connect physically with their old and new heroes. That’s the power of Disney. They invest a lot of money in creating content and then luring consumers to visit their parks, resorts, cruise lines and buy merchandise. While other streamers can compete with this company on the content front, few, if not none, have the capability and resources to replicate what Disney has on the other part of the equation.

Disney’s Streaming Services

Because Disney+ is touted as the company’s single most important priority, all attention is fixated on the health of the service. At the end of Q2 FY2021, Disney+ has almost 104 million paid subscribers, up from 95 million in the previous quarter. The net add of 8.7 million paid subscribers is much lower than what Disney added in the previous three quarters during Covid. The executives blamed the following for the smaller add:

  • Covid pulled forward subscribers
  • A price increase in two main markets: EMEA and North America
  • No new market launch. The launch of STAR+ in Latin America is postponed to the end of August to leverage major sports events such as the new season of Premier League, La Liga & Copa Libertadores
  • A disrupted schedule of Indian Premier League, India’s national cricket league

On the earnings call, the company reaffirmed its target of 240-260 million paid subscribers on Disney+ at the end of fiscal year 2024. To meet the lower end of that target, by my calculation, Disney needs to have a net add of about 12.5 million subscribers every quarter between now and Q4 FY2024. As you can see above, there are quite a lot of factors that can affect the number of subscribers, but if I have to make a bet, I’ll say that they can do it. There are two reasons. The first one is that Disney+ right now is only available in 31 countries. It’s not even live yet in Asian or LATAM countries where there are a lot of folks. My country alone has 96 million people and 50% of those are between 18 and 54 years of age. There are a lot of spots on the world map where Disney+ can expand its presence. The second reason is that the company lowballed their subscriber target before. It’s likely that they may be doing it again with the current one.

The main criticism of Disney’s current growth strategy is that it relies too much on the low ARPU market in India. Hotstar makes up 1/3 of Disney+ total subscriber base, up from 25% two quarters ago. The low price in India suppressed ARPU of Disney+ from $5.61, excluding Hotstar, to just $3.99, including Hotstar. While ARPU is obviously an important part of a streaming business, it’s equally important to take into account where Disney+ is at the moment. Fans of Netflix usually cite its scale as the main competitive advantage. In other words, Netflix has a cost advantage because it can spread content expenses over many more subscribers (around 200+ million). To negate that advantage of Netflix, Disney+ has to grow its base, but it would need a magic wand to acquire more users and grow ARPU because that’d be virtually impossible.

Disney subscribers, net adds and ARPU
Figure 2 – Disney’s Subscribers, Net Adds and ARPU

Any comparison between Netflix and Disney+ at this stage is very challenging. First of all, Netflix is available in 190+ countries whereas Disney+ is only in 31. When Netflix started, the category didn’t exist and it had to be a trailblazer. But it also means that Netflix didn’t have a fierce competitor like its current version nowadays. Any price it set was essentially the best price at the moment. On the other hand, while Disney+ doesn’t have to create a whole new market like Netflix did, it has to compete against an established and experienced rival that has a major cost advantage. There is a vicious cycle at play here. Netflix’s competitors have a cost disadvantage because they have a smaller scale. The longer that disadvantage persists, the hard it is to plow billions of dollars a year into content. Without content, there wouldn’t be any subscribers, hence, Netflix’s advantage is reaffirmed. As a result, the likes of Disney+ have to prioritize scale over ARPU for the time being, to avoid being sucked into that vicious cycle. Another difficulty lies in the different operating models. Netflix’s content is rarely available in theaters. Its content library is available to all subscribers without restrictions. Meanwhile, Disney+ releases its content in different fashion:

  • Exclusively available to all subscribers without additional charge
  • Exclusively available to subscribers with Premier Access (about $30 per title) for a few weeks before being widely available to all
  • Available first in theaters for a period of time (45 to 90 days) before going to Disney+

The variety in the release strategy may affect the user acquisition to Disney+, compared to Netflix, but who is to say that it doesn’t help Disney generate more money or profit from taking a different path? Disney+ tried the Premier Access with Wulan and a couple of movies afterwards. I reckon that it must have yielded some success so that they decide to keep it moving forward. With an exclusive theater period, Disney is trying to see if the high margin revenue from theater owners are worth suppressing the subscriber base on its flagship streamer. Whether the flexible model employed by the iconic brand or the dedicated philosophy of Netflix will prevail remains to be seen.

Besides Disney+, I am excited about ESPN+. The service has been growing very nicely in terms of subscriber count and ARPU. At 13.8 million subscribers, there is still a lot of upside within the US to go. For sports fans, its content library is very appealing with Serie A, Bundesliga, UFC, Australian Open, US Open, Wimbledon, MLS & College Basketball. The new deals with Major League Baseball to stream 30 games per season till 2028 and with La Liga in an 8-year deal to stream 300+ matches per year in both English and Spanish will absolutely make it more attractive. Since streaming rights need to be negotiated for every geography, it remains to be seen how or if Disney is able to grow ESPN+ out of the US.