Weekly reading – 1st October 2022

What I wrote last week

The push to grow the complex Bundles by Disney

Decoupling – A great tool to analyze business strategies and disruption

Business

Instacart Offers Grocers the Future of Grocery in a Bundle. Instacart becomes a much more interesting company with these innovations. Pushing a heavy cart around and waiting in line forever just to check out is not a great customer experience. The Caper Cart sounds like a game changer for grocers, shoppers and Instacart. These products are so different economically than delivery services. This helps diversifying Instagram, adding revenue stream and reducing risks.

Why India’s small sellers still don’t trust Amazon. The relationship between Amazon and Indian sellers is so strained that I struggle to see how the company can succeed in this important market.

What Chinese media reveals about Shein’s secretive operations. “There are two main kinds of suppliers: “free on board,” those that make simple designs they haven’t devised themselves, and “original design manufacturers,” those that do both. They all feed into Shein’s sprawling manufacturing execution system (MES). The designer-suppliers will find pictures online and send a selection to Shein’s internal buyers for consideration; the buyer and their manager settle on a final pool. Once samples have been received, there might be two, or even three, rounds of changes before manufacturing can commence. (The entire time, everything needs to be recorded in the MES — materials, pricing, even chat logs — something suppliers balk at, because, if the deal falls through, all the information sits in Shein’s records, and there’s nothing to stop them from producing it elsewhere.). hein is ruthlessly efficient when it comes to evaluating its suppliers, according to analysis by Zhongtai Securities. A scoring system sorts the wheat from the chaff. Timeliness of procurement and delivery, stocking and delivery, rate of defects, and the success rate of new products make up 40% of a supplier’s score. The remaining 60% is based on order volume. They are then tiered into five levels, and the bottom 30% of the lowest tier are culled.”

The Ascendancy of Ahold Delhaize. “Ahold Delhaize USA has been strengthening its position as it looks to take its hyper-local value proposition national. After blockbuster revenue years in 2020 and 2021, Ahold Delhaize has demonstrated that it can keep growing by focusing on omnichannel innovation, prioritizing value and expanding its assortment of high-quality, low-cost private-brand products. “

($) The Unstoppable Rise of Aldi in Britain Shows No Sign of Slowing. “A recent visit to Purley, south London, found the parking lot outside Aldi boasting BMWs, Land Rovers and Porsches and shoppers choosing Aldi over nearby branches of Lidl and Sainsbury, as well as the upmarket Waitrose 10 minutes away. An extra 1.5 million customers have visited Aldi over the past three months. When sales were up by at most the low single digits at most UK supermarkets, they rose 19% at Aldi and 20.9% at Lidl. Part of the strategy is economy of scale. Aldi has about 2,000 key products in store, compared with as many as 30,000 in some large rival supermarkets. By stocking just one ketchup, for example, Aldi has a tight supply chain and can avoid pricing rows like Tesco’s recent spats with Kraft Heinz Co. and Mars Inc.

How Bryan Lourd became one of the most powerful people in the history of Hollywood. A phenomenal story. Bryan Lourd worked his way from a mail room to being one of the most powerful people in Hollywood.

How Arm conquered the chip market without making a single chip, with CEO Rene Haas. I am not a fan of Nilay or The Verge’s new website look, but this is a great interview on one of the most important players in the chip industry. Especially when Arm is not really a household consumer name

Amazon dominates the $113 billion smart home market — here’s how it uses the data it collects. Amazon has a major trust issue because no matter what the company says, I don’t think consumers trust Amazon to do the right things with their data.

Other stuff I find interesting

Why the Rush to Mine Lithium Could Dry Up the High Andes. “With the world’s car fleets transitioning to electric propulsion, Argentina, with reserves of up to 60 million metric tons, according to government estimates, is well-positioned to profit from the lithium rush. Lax regulation and low taxes make its part of the Lithium Triangle — in the northwestern provinces of Jujuy, Salta, and Catamarca — “especially attractive for foreign investors,” according to Lucas Gonzalez of the National Scientific and Technical Research Council (CONICET), a government agency in Buenos Aires. The country could soon become the world’s second-largest lithium producer, after Australia, and the largest producer from evaporative mining. But every ton of lithium carbonate extracted from underground using this cheap, low-tech method typically dissipates into the air about half a million gallons of water that is vital to the arid high Andes. The extraction lowers water tables, and because freshwater often sits on top of salty water, this has the potential to dry up the lakes, wetlands, springs, and rivers that flourish where the underground water reaches the surface.

Charging cars at home at night is not the way to go, Stanford study finds. “The move to electric vehicles will result in large costs for generating, transmitting, and storing more power. Shifting current EV charging from home to work and night to day could cut costs and help the grid

New ways to make more sustainable choices. I’d love to try out these new features, especially the updates on recipes

iPhone 14 Pro Review: No phone is an island. I like Jason’s review of iPhone 14 Pro. A few friends of mine belittled Apple for the lack of innovation. I mean, that criticism is fair when it comes to the lower lineup iPhone 14, but the Pro version is much further ahead with a lot of cool features and innovation. It’s also great financially for Apple, to sell more expensive and higher margin phones, especially when there is shortage of components.

How Apple Pay works under the hood? An example of how complex payments are under the hood and how far technology has come to enable such complexity in mere seconds

Stats

Biden’s plan to cancel student loans will cost taxpayers $400 billion, among the most expensive initiatives his administration puts forward

6000 children died on EU roads in ten years

Amazon commits to hiring 5,000 refugees by the end of 2024. A big YES to this!

The push to grow the…mind-twistingly complex Bundles by Disney

Disney recently announced a slate of price increases for their products: Disney+, ESPN+ and Hulu. Specifically, Disney+ will cost $10.99/month starting this December, up from $7.99. Next month October 2022, Hulu subscribers will pay $7.99 and $14.99 for the ads-supported and premium plans, up from $6.99 and $12.99 respectively. Meanwhile, ESPN+ users already saw the largest increase (percentage wise) as plans that used to cost $6.99 are now worth $9.99.

In addition, there will be a new ads-supported plan for Disney+ in December 2022 which will cost the same as the old premium Disney+ ($7.99). Due to all of the upgrades and additions, Disney also updates their bundles and it’s…unnecessarily complicated. Here is what it looks like

There are a couple of things worth discussing from this recent update from the iconic company. A couple of years ago, Disney set an ambitious goal in subscriber count and profitability for Disney+, as follows:

  • Disney+: 230 – 260 million subscribers with Disney+ Hotstar making up 30-40% of the base and profitability by FY2024
  • Hulu: 50 – 60 million subscribers by FY2024 and profitability by FY2023
  • ESPN+: 20 – 30 million subscribers by FY2024 and profitability by FY2023

Here is where the company was as of the end of the last reported quarter (Q3 FY2022):

  • Disney+: 152 million subscribers with Hotstar making up 38%. The service added less than 10 million new subscribers per quarter
  • Hulu: 46.2 million subscribers, adding less than 1 million new subscribers every quarter
  • ESPN+: 22.8 million subscribers

As the numbers show, ESPN+ is the only service that looks like it’s going to deliver as promised. There is no guarantee that the subscriber count will stay at this level in 2 years, but ESPN+ does earn the benefit of the doubt. Unfortunately for Disney, the other services are likely going to miss the subscriber target at this pace, given the intense competition and churn. And that is why Disney is pushing HARD on bundles at the moment.

First, the above graphic shows how aggressively Disney sells bundles at discount. Second, the emphasis on the Disney Bundle is all over their digital properties. Go to any of the three services’ websites and you will be hit in the face with the call to get the Bundle. The reason behind such aggressiveness in Marketing is that Disney counts every Bundle subscriber as a paid subscriber to each of the service included in the Bundle. In layman’s terms, if you subscribe to a bundle featuring all three services, you are counted as a paid subscriber in all three. That’s why Disney is so invested in pushing their Bundles, because they are running out of time to meet the subscriber goal for Hulu and Disney+.

It is not lost on me that a bundle is a great way to keep churn low. Subscribers that use all three platforms are more inclined to stick around than those that only pay for one. Plus, the prices of the Bundles are very competitive. HBO Without Ads costs $14.99/month while Netflix Premium, the only plan with 4K on Netflix, stands at $19.99/month. Compared to these alternatives, Disney Bundle 4 above looks pretty attractive, especially if you are a family with different interests.

Even though I see the rationale behind their Marketing push of the Bundles, I have a couple of concerns. First, I do expect more ambiguity regarding Disney’s reported numbers. Like, if someone subscribes to a bundle with all three services, how is Disney going to slice and dice the revenue among them and what would be the impact on each service’s Average Revenue Per User and profitability? How much of ARPU and profitability comes from advertising revenue? Would Disney disclose the role of Bundles next year and beyond? We won’t get that much clarity and we will have to trust Disney on whatever they elect to disclose, but if you are an equity analyst, good luck with your forecast!

Second, the number of individual and Bundle plans is really dizzying and unnecessarily complex. Just look at how many plans consumers have to look, analyze and ultimately choose. Choice overload can be a real issue here. I wonder why Disney feels the need to keep Bundle #3 and #6 on the graphic above. To make matters worse, the company currently has an intro offer that artificially lowers the price of some plans, mostly Bundles, in the next three months before the real levels take effect. That’s just too much complexity for consumers and if they complain about being tricked into paying more, I do see why that can be the case.

Can an unsuspecting casual viewer know easily that this plan has ads on Hulu and prices will increase to $75/month soon?

Personally, I’d love for Disney to display all the individual plans’ prices on their websites so that consumers can do the maths and calculate the savings themselves. Right now, consumers have to go to three separate websites or an Investor Relation page to see how much they would have to pay for Disney+, ESPN+ and Hulu individually. That’s not customer-friendly at all!

Weekly reading – 10th September 2022

What I wrote last week

Apple is gaining share in advertising; Disney is contemplating an Amazon Prime like subscription

Business

The optimal amount of fraud is non-zero. A great post on fraud as an unavoidable risk of doing business

How Capital One Became A Leading Digital Bank. Some folks say that Capital One’s rise as one of the premier credit card issuers results from its robust data analytics. That may be true, but it’s still just a surface-level observation. What really drives Capital One’s growth is their investment in infrastructure & talent, as well as smart design of process to utilize such resources. In this article, you’ll see their CIO discuss this topic at length. As someone who works in the credit card industry, I admire what they have done and can really see why they are successful.

($) Amazon Is Still Trying to Digest Whole Foods. Integrating any multi-billion acquisition is always a challenge, but the task is even more daunting when the acquirer has to divert focus and resources to its own grocery effort. To that end, it’s impossible for outsiders to judge whether this move has been a success so far since Amazon doesn’t break out Whole Foods’ individual performance. Asking Amazon’s executives for their evaluation is similar to asking a barber if you need a haircut. It’s always going to be biased opinions.

The Facebook button is disappearing from websites as consumers demand better privacy. In the past, Facebook log-in button was all over the Internet. It was convenient and people weren’t aware of how Facebook did surveillance tracking over them. Now, the public knows and they don’t trust Facebook. The lack of trust leads to low usage as well as causes websites to be concerned about being collateral damage. As a consequence, websites don’t want anything to do with the then popular blue button. This is a prime example of how Facebook’s bad reputation is biting them in the behind and unfortunately for them it will not be the last as long as their business model is advertising based on surveillance tracking. “According to his company’s data, out of a sample of 10,000 sign-ins, 42.7% of users signed in with Google, 26.5% used Apple, 20.1% signed in via email and just 10.7% used Facebook.”

What’s SAP?

The Long Tail: The Internet and the Business of Niche

Other stuff I find interesting

Less is more agile. I agree with a lot of points that this article brought up. The traditional Waterfall method of delivering software had downsides which were especially exposed when software became increasingly complex. Only when technology got sufficiently sophisticated did we come up with a new methodology that is more efficient and allows us to incorporate changes faster. That’s Agile. But at the end of the day, Agile is just a tool and how useful it is depends a lot on who is using it and for what purposes. It’s NOT helpful to blindly follow what the coaches that have no knowledge of your organization’s culture or business say. It’s NOT helpful either to keep preaching the benefits of Agile while ignoring its downsides and what it demands from practitioners. What works for some won’t work for others. Just be mindful of what you sign up to.

I Worked at Capital One for Five Years. This Is How We Justified Piling Debt on Poor Customers. Consumer loan issuers do address real consumer needs. Health emergencies, family tragedy, desire to investment, etc. Sudden need for capital infusion. However, these issuers make most money from interest income, meaning that they WANT you to pay interest and not to default. That’s clearly not in line with the best interest of borrowers. Capital One, in this case, is just an example.

Bones: Why Utah’s desert is a paleontologist’s playground. “Only a very tiny percentage of species that ever existed on Earth have been fossilized,” according to the U.S. Geological Survey. Of those that have, only a fraction have been discovered. That’s in part due to accessibility; many fossils are likely buried so deeply that they’re unreachable. But it’s also because paleontology, as a science, remains fairly new. This particular site, now known as T2, is the confirmed resting place of a tyrannosaur, which may be the first complete adult specimen of an incredibly rare species. And the fact that it lies under 10 feet of ancient sandstone conglomerate in the Utah desert is no coincidence. Utah has been known as a paleontological treasure chest since the late 19th century. In fact, the Utah History Encyclopedia says the state boasts a “prolific fossil record that spans the entire ‘Age of Dinosaurs.’”

European cities look to phase out cars in ‘transportation revolution’. “Across the continent, urban centers are restricting cars from entering certain parts of cities as well as imposing new fees. In Paris, which holds car-free Sundays, only newer, less-polluting diesel and gasoline-powered cars can travel into “low-emission zones” across the city; by 2030, only electric or hydrogen will be able to enter the French capital at all. In Norway, where 78% of new vehicles are electric, Oslo eliminated most on-street parking spots in the city’s core. The medieval Belgian city of Ghent limits vehicles in the city center by offering free shuttles from low-priced car parks on its periphery. Drivers heading into London during business hours must pay congestion fees of $17 a day and further entry fees of $15 simply to enter “ultra-low-emission zones”; in some parts of the city, cars will soon be forbidden altogether.”

History of Labor Day

Vietnam’s Mu Cang Chai in ripe rice season a feast for the eyes. Beautiful as it is, this part of Vietnam is quite dangerous to get to. Some folks already lost their life because of treacherous roads and conditions. One of my friends nearly lost hers a few months ago. Definitely not for conservative and risk-adverse folks like myself, but I would love for the world to see my country and what we have to offer.

Stats

“Lord of the Rings: The Rings of Power” series drew more than 25 million viewers worldwide on its first day

China Accounts for 36% of Global Peanut Output

Apple TV+ allegedly surpasses 6% of the global market share

Source: Recurrentauto

Apple is gaining share in the ads world; Disney is contemplating an Amazon Prime like subscription

Apple is gaining share in the ads world

Per CNBC

According to a study published Tuesday by Appsumer, Apple is gaining momentum in digital ads, while Google and Facebook appear to be losing steam.

The research, based on an analysis of the online ad budgets of over 100 different consumer app companies, found that Apple’s ad business has benefited from the company’s major iOS privacy update in 2021, which made it more difficult for companies like Facebook to track users across the Internet.

In terms of overall app developer spend on online advertising, referred to as share of wallet, Google remains at the top, with 34%. Facebook is second at 28%, followed by Apple at 15%. Amazon wasn’t listed because it’s not a platform for developers.

“One of the things that’s quite interesting is the ATT measurement limitations that are kind of put on the wider network doesn’t exist in the same way for Apple,” Lais said. “So you could say Apple has slightly more visibility or an advantage across the other channels on iOS.”

As a shareholder, I am glad that the management team has found another sizable stream of income, especially one with a high margin like advertising. With more than 1.8 billion devices in its installed base which was reported in January 2022, the real estate on the App Store and some of Apple’s native apps is highly valuable to advertisers. Which developers or brands don’t want to talk to iOS customers known to be wealthier than Android counterparts? Financial Times reported that Apple’s ads business is expected to reach $30 billion in revenue and double its workforce by 2026. Given what advertising has done for Amazon so far, such expectation has some truth in it.

But the rise of Apple Ads also raise some concerns for me. First, ads are intrusive. Folks usually say that this is one of the main reasons why we can access free content on the Internet, but consumers won’t care. Some will annoyedly question why they still see sponsored content in some Apple native apps even though they are already subscribers. Personally, I wouldn’t enjoy that. As a result, if Apple decides to push the ads loads on their platform, they will need to be mindful of the user experience and carefully safeguard it.

In the same token, I am concerned about the impact that ads have on how users search for apps on iOS devices. Let’s say that you want to look for a meditation app on the App Store. Will the first results be the ones with the best user reviews and ranking? Or will they be supplanted by advertising apps? One of the criticisms leveled at Amazon is that they favor advertising merchants in their search results instead of giving shoppers what the actual best products are. I can see the same scenario is awaiting Apple.

Furthermore, the more Apple benefits from its ads business, the more likely it will have increasing scrutiny from lawmakers around the world. Critics of the company strongly argue that its privacy-centric initiatives like ATT are nothing other than schemes that are designed to enrich Apple and cripple competitors like Facebook. To be fair, I can see where skeptics are coming from. However, if you view this issue through the lens of direct customer relationship, Apple has every right to strengthen the relationship with its customers. It just happens that they manage to find a way to make money while doing so. Nonetheless, lawmakers do not always think critically and act reasonably. They have their own agendas to further, donating organizations to care for and voters to answer to. If there is enough outcry, there will be more hearings and regulations focused on the market power that Apple wields.

Knowing Apple, I don’t expect official figures on the size of its ads business any time soon. The media coverage of Apple; however, will surely have things to say about this ads business.

Disney is contemplating an Amazon Prime like subscription

Per WSJ

Walt Disney is exploring a membership program that could offer discounts or special perks to encourage customers to spend more on its streaming services, theme parks, resorts and merchandise, according to people familiar with the discussions.

The program would be somewhat akin to Amazon Prime, which offers advantages such as free shipping, discounts at Whole Foods and a complementary streaming video service for a monthly or annual fee, the people said. Internally, some executives have referred to Disney’s initiative as “Disney Prime,” although that won’t be the name of the program, one of the people said.

Disney already has a special program for superfans, the D23 Official Fan Club, which costs $99.99 to $129.99 a year and comes with access to exclusive events and merchandise. That program offered members a discounted three-year subscription to Disney+ in 2019. A new membership program would be different in that it would be targeted at more casual Disney fans and customers.

As an early step to better link Disney products and services, Disney is working to enable subscribers to its Disney+ streaming service to buy merchandise such as T-shirts, themed accessories and children’s costumes associated with some of its shows by scanning a QR code on the service that links to the Shop Disney website, people familiar with the plan said.

Barring any new details, I am very skeptical of this Disney Prime plan simply because Disney is very different from Amazon and I don’t believe the former can create the same magic as the latter did with their world-famous subscription. What makes people like Amazon Prime so much that they are willing to pay $140/year? It’s not Prime Video or Amazon Music credits. They are valuable in increasing Prime’s stickiness. The primary hook is the convenience in shopping experience (deliver and return), a gigantic variety of items to shop and special deals.

Unfortunately, Disney has no asset resembling Amazon’s eCommerce ecosystem. Disney Parks are so expensive that fans will not make regular visits. Plus, since they are only available in California and Florida, how would Disney convince customers from the rest of the country to visit regularly enough to pay for a subscription? Trips to Disney Resort, Hotels or Cruise are one-off purchases, rather than repeaters. The company already has paid plans for their media content in ESPN+, ESPN, Hulu and Disney+ and their merchandise is not something that customers will order regularly. Seriously, how many Avenger-themed shirts do you think you would order every year? Even if you planned to buy one of those shirts every 6 months, would you buy a monthly or yearly subscription just to have $5 off?

Furthermore, I don’t think Disney should or could build an eCommerce site like Amazon, either. It’s not in their circle of competence. It’s expensive and it’s extremely difficult. Any such attempt would destroy shareholder value and damage the company. And if they don’t have anything that can entice consumers to subscribe, especially when this plan is geared toward casual fans, how can Disney Prime succeed? To the company’s defense, they did say that Disney Prime was just one of the ideas on the table. I hope that they have better ideas because I struggle to see how this one will succeed.

Weekly reading – 3rd September 2022

What I wrote last week

Two tips on personal finance

Business

($) Disney’s New Pricing Magic: More Profit From Fewer Park Visitors. As a shareholder, I am more concerned than happy after reading this article. Annual pass-holders are loyal customers and should be valued. Instead, the recent changes signal to them that money is more important than the long-standing relationship forged with the company. Disney’s theme parks are unique and hold precious memories in a lot of folks, but there is a price for everything. At some point, customers will realize that however fond some memories are, it’s just too expensive to bring the whole family there. I hope Disney executives wake up today, read this piece and take some actions before any revolting can happen.

Where Amazon is heading in health after the Amazon Care failure. Amazon is known for running lots of experiments and tinkering till they find a solution that actually works. Amazon Care is an example of that. They realized that they were not able to venture into healthcare by themselves. Hence, a string of acquisitions ensued, namely Signify Health and One Medical. There are risks still with this strategy, though. Cultural conflict between acquired companies, and even between them and Amazon. Difference in data infrastructure. Market cannibalization. It’s just the start of a multi-year and likely very expensive project.

Cash is king for EV makers as soaring battery prices drive up vehicle production costs. A good round-up of EV makers

($) Starbucks Is Rethinking Almost Everything, Including How to Make Frappuccinos. What seems to be a straightforward operation at a Starbucks store may be more complex than you think. Read this piece to learn more how Starbucks is adjusting to changing tastes and responding to complaints from baristas

Be good-argument-driven, not data-driven. Data is your prisoner. If you are motivated enough and if you torture the prisoner enough, it will say whatever you want it to say. Whether it’s intentional misrepresentation of data or incapability to analyze data properly (no apples-to-apples comparison, for example), it’s easier to preach “data-driven” than implement it. Too much of anything can’t be a good thing. There must always be balance. There is indeed a place for data, but since it’s just a tool, its effectiveness hinges a lot on how we use that tool.

Medium’s new CEO on the company’s journalism mistakes, bundle economics, and life after Ev Williams. I used to like Medium a lot. So I can’t help but feel like the company missed a gigantic opportunity to strengthen its advantages and grab market share. Now, it’s too late for Medium to rectify its mistakes.

Zenly is still hugely popular, so why’s Snap shutting it down? It’s sensible to reduce headcount when Snap already gets its hands on Zenly’s technology. It’s also difficult to argue against avoiding cannibalization between the potential Snap Map and Zenly. What should be questioned is whether this plan will come to fruition or will be a massive write-down. Why do I say so? Snap introduced a mini drone not long ago only for it to abandon the plan completely later to be more focused. In case you haven’t noticed, Snap’s latest forecast is disappointing and what investors don’t know is how this $250 million acquisition can help the company move forward

Going Private: How to Succeed in Store-Brand Sector.In the past, retailers could rely more on the in-store environment to promote their store brands. Today, in our omnichannel world, consumers can find a product anywhere, so retailers must have an online presence for their brands. FMI’s report notes that there’s an opportunity for more retailers to tie their loyalty programs to their private brands — particularly when it comes to the online side of the business. Only a third of shoppers using their grocery store’s loyalty program said that they receive extra points for purchasing store brands. This is a way for retailers to promote more online private-brand purchases including the use of digital coupons.

Other stuff I find interesting

The Godfather of South Korea’s Chip Industry. “His experience at Fairchild solidified his belief, first inspired by his father, that a true “engineer’s mind” requires practical skill as much as theoretical knowledge. In addition to performing experiments, he made a habit of reading internal technical reports and memos that he found at the company library, some of which he later brought to KAIST and used as teaching material.

Live cheap or live expensive: The choice is yours in Ho Chi Minh City. As a Vietnamese, it’s interesting to me read about expat life in Vietnam. I have my reservation on the $10 daily budget on food for him and his wife (and a beer). Having lived in the US since 2016, I am not too familiar with electricity bills in different areas of Saigon (a local name of Ho Chi Minh City) either. But he made a good point that it’s important to live close to where you work. The traffic in the city is egregious. Even a 5km commute which is like peanuts in the US can take a lot of time and cause so much frustration that a little bit more rent to help you avoid that is worth it.

The Midwit Trap. “An intelligent person will know that there is no correlation between the simplicity of a solution and the sophistication of the reasoning that led to it”

Why A4? – The Mathematical Beauty of Paper Size

Stats

July U.S. eGrocery sales climb 17% versus year ago to $7.8 billion

According to Edison Research, 35% of adults in America own a smart speaker (their sample size of about 1,200 subjects gives me a little concern)

Average transaction price of new vehicles in the U.S. was up 11.8% year-over-year in July 2022

Roads that need repairing in Nebraska cost each driver $461 per year

iOS US market share hits all-time high and exceeds 50% for the first time

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.