Weekly reading – 13th March 2021

What I wrote last week

My thoughts on Square’s acquisition of Credit Karma’s tax unit

My review of the book Think Again: The Power Of Knowing What You Don’t Know

Business

An interview with Elliot Turner on Twitter. Lots of good stuff in here.

Octahedron Capital publishes a super interesting presentation every quarter, compiling quotes from executives

A very interesting piece on how Jeff Bezos approached design. I love the anecdote on how Amazon’s logo came into beings.

How Salesforce became Silicon Valley’s best late-stage tech investor. Salesforce is a prime example that you should care more about Operating Income than Net Income if you want to evaluate a company’s operations

A great post on the importance of reinvesting in a business. As the saying goes, it’s one thing to get to the top of the mountain, it’s another to stay there.

A great conversation between The Verge and Twitter’s Head of Consumer Product. The company announced some very interesting product developments in the pipeline. As a fan of the platform, I can’t wait to see what unfolds next

Postmates added $70 million in revenue and saved $3 million in network fees with Stripe

Neil Cybart published a new article on the importance of Apple’s retail stores

A very telling piece on how Facebook’s internal effort to curb misinformation using AI was punted by Zuckerberg’s desire for growth

What I found interesting

Apple Gave Us an Exclusive Look Inside Its Next-Generation Fitness+ Studio

Tesla told California DMV that its future autonomous vehicles wouldn’t be fully autonomous. What else is new?

WSJ’s profile on Manchester United star forward, Marcus Rashford. If you are not familiar with football (yeah, the real football where the ball touches feet more than hands), Manchester United is one of the richest and biggest clubs in the world. It has a reputation of playing home-grown talent and actually has been fielding at least one academy player every game for the last few decades. Marcus Rashford is the latest biggest home-grown star that came out of the famed academy. Inspired by his difficult childhood, Rashford took on the British government last year, in a campaign aimed at providing school meals to children during Covid-19. The government listened and hundreds of kids were fed because Marcus Rashford had the will to do what his reputation enabled him to.

Corporate logos are changing with the time

A look into the cyber-surveillance world of Israel

Stats that you may find interesting

Costco edged by Amazon and Apple to lead all brands in customer satisfaction

India leads the world in IPv6 adoption rate at 63%

Disney+ has more than 100 million subscribers. Though the count is impressive, comparing it with Netflix’s subscriber base, either now or when it first started, may require a lot of unpacking. The consumer attitude towards streaming is different now than it was when Netflix began to stream its content online. The mix of subscriber base is also different. Disney+ has 30% of its subscribers. Nothing inherent bad about it, but to have an apple-to-apple comparison, one must figure out whether Netflix has the same composition. Plus, the streaming competition 10 years ago for Netflix might be much less fierce than the current landscape.

If you need more evidence as to how different a GOP government and a Democratic government are, here it is. One proposed a law that benefits low-income folks (Democrats) while the other passed a law that put more money in the pocket of the richest.

Source: TPC

Bezos is stepping down and Amazon is in a great shape

Arguably few have made headlines this week more than Jeff Bezos, the founder and current CEO of Amazon. The company announced yesterday that Bezos was stepping down in Q3 this year and is going to be replaced by Andy Jassy, the boss of AWS. While it is surprising, I hardly find the news shocking. Bezos hasn’t been on the company’s earnings calls for years. He appeared in front of Congress last year, showing that he didn’t know in details the company that he founded and is still running. To be clear, I don’t blame him. If he doesn’t spend much time in the office yet rather spends it on other projects that interest him and the company still does exceptionally well, why not? In his letter to the whole company, Bezos said:

I’m excited to announce that this Q3 I’ll transition to Executive Chair of the Amazon Board and Andy Jassy will become CEO. In the Exec Chair role, I intend to focus my energies and attention on new products and early initiatives.

As much as I still tap dance into the office, I’m excited about this transition. Millions of customers depend on us for our services, and more than a million employees depend on us for their livelihoods. Being the CEO of Amazon is a deep responsibility, and it’s consuming. When you have a responsibility like that, it’s hard to put attention on anything else. As Exec Chair I will stay engaged in important Amazon initiatives but also have the time and energy I need to focus on the Day 1 Fund, the Bezos Earth Fund, Blue Origin, The Washington Post, and my other passions. I’ve never had more energy, and this isn’t about retiring. I’m super passionate about the impact I think these organizations can have.

Source: Amazon

If you’re more interested in the strategic direction of the company and side projects, why not giving opportunity to someone else who is hungry for the top job and to manage the day-to-day operation. Plus, I don’t imagine he enjoyed being called to testify in front of Congress, especially when the regulatory scrutiny on big tech companies has intensified. And I think Amazon is in a great shape to continue to grow with the new CEO. Here is why:

Amazon recorded $125 billion in sales in Q4 FY2020, making its four-quarter rolling average revenue now almost $100 billion. For Q1 FY2021, Amazon’s guidance is to generate between $100 and $106 billion in revenue. More impressively, the quarterly revenue grew at least 37% YoY each. In terms of major business segments, North America is still the biggest piece of the pie, yet it still outgrows International and AWS. The latter is now a $45 billion run-rate business. Looking deeper at the business lines, Online Stores, 3rd Party Marketplace and AWS are still the three biggest, but the fastest growing is Advertising, which stands at the run rate of $21 billion. In terms profitability, Amazon used to run in the red with International. Not any more. International has been profitable for the last 3 consecutive quarters, making all three major business segments of Amazon profitable.

Furthermore, Amazon in Q4 FY2020 posted $31 billion free cash flow TTM, which is only slightly less than 50% of their operating cash flow TTM. It implies a heavy CAPEX back into the business. Also, Amazon, on average, spends about $15 billion a quarter on shipping costs, which constitutes around 23% of the combined sales of its Online Stores and 3rd Party Marketplace. While it’s a lot of money, if it helps Amazon achieve great services and customer satisfaction in multiple markets, it will be a tough challenge for anyone who wants to compete with them.

In my view, the results that Amazon boasted are nothing, but highly impressive. The company has a stellar reputation with consumers and owns the relationship. That’s why it can sell advertising, subscriptions, its own goods and goods of other parties. There are still a lot of room to grow. Not only can it still gain market share in the retail market in the US, but it can also expand internationally into more countries and continue its current profitability overseas. AWS can still grow, especially when Covid-109 has spurred companies to become digital. The brand, the scale and the infrastructure that Amazon put in place are gigantic advantages that aren’t easy for challengers to overcome. The culture that Bezos has instilled in the last 27 years is still there and even though he is passing the CEO torch, he is still around to take actions, if necessary.

Amazon's revenue and YoY growth
Figure 1 – Amazon’s 4-quarter rolling average in Revenue and quarter YoY Growth
Amazon Business Segments' Revenue
Figure 2 – Amazon’s Business Segments’ Revenue
Amazon's business segments' revenue
Figure 3 – Segment Revenue
Amazon's Operating Margin
Figure 4 – Amazon’s Operating Margin
Figure 5 - Amazon's Free Cash Flow TTM
Figure 5 – Amazon’s Free Cash Flow TTM
Amazon's Shipping Costs
Figure 6 – Amazon’s Shipping Costs

Antitrust hearing with 4 big-tech CEOs

A disappointing hearing

Today, the long anticipated hearing by The House Subcommittee on Antitrust, Commercial, and Administrative Law which features Jeff Bezos, Tim Cook, Sundar Pichai and Mark Zuckerberg, the four powerful CEOs of big tech companies, took place. Suffice to say, I am not surprised at what transpired, but I am pretty disappointed. I don’t think that there is an objective or a desirable outcome from this hearing. While Democratic officials focused more on the issue at hand which concerns antitrust practices by these companies, their Republican colleagues, in particular Representative Matt Gaetz and Jim Jordan, were more interested in an entirely issue: alleged bias and censorship of conservative views on social media. Jim Jordan even compared Apple’s famous 1984 ads campaign to the so-called cancel culture almost 40 years later! Ranking Member Sensenbrenner even mistook Facebook with Twitter when he tried to question Mark Zuckerberg on Twitter’s decision to temporarily suspect Don Jr’s account. You don’t need to spend time on the hearing, but you can get some idea on the quality of this event based on those incidents.

Notwithstanding the difference in pointed questions, every lawmaker in this hearing did more grandstanding than listening. The 5-minute rule is there to ensure that every lawmaker has a chance to ask questions and that witnesses don’t digress. However, the rule’s side effect is that lawmakers don’t wait for witnesses to answer. Instead, they push their own assumptions/allegations on witnesses or just restrict complicated matters to a “Yes/No” question. If this hearing is to uncover how these CEOs approach competition, why is it that they weren’t allowed to talk more and elaborate?

The format of the hearing needs to change in order to yield results. I have a few thoughts in mind on what can be implemented:

  • Every question at a hearing should stick to a topic. Anyone who violates this rule twice should be kicked out of a hearing. For example, Jim Jordan today didn’t ask questions on anti-competition. He threw allegations towards the witnesses on alleged bias to conservatives. So did several other GOPs. How do those questions belong to the Antitrust conversation at hand?
  • Every lawmaker should have 5-10 minutes, but there should only 5-10 questions allowed. A limit on the number of questions can help ensure the quality of questions, give witnesses more time to elaborate and reduce grandstanding. Many issues are complicated and take some explanations.
  • Before a hearing, questions should be compiled in advance on a portal/website and witnesses must answer in writing before appearing in front of lawmakers. Written answers offer witnesses space and time to elaborate and remove the constraints of time. During hearings, lawmakers can just build off of the written answers submitted in advance.
  • Similarly, there should be a collection of follow-up questions that are answered after a hearing.

Not every acquisition of a competitor violates antitrust laws

Facebook and Google were grilled today on their previous acquisitions: Facebook on Instagram, WhatsApp and Google on DoubleClick. I was baffled by this line of question. Take Facebook’s acquisition of Instagram several years ago as an example.

When Facebook paid $1 billion to acquire Instagram in 2012, nobody could be 100% sure that it would be what it is today. At the time of the acquisition, Facebook was already a big player primed for its IPO and heavily invested while even though it was growing fast, Instagram had around 30 million users, generated no revenue and was valued at $500 million. The startup was struggling to grow its team and infrastructure. Joining Facebook did give Instagram benefits on the way to having more than 1 billion users, as the book No Filter noted below

“It was the most dire server problem in company history. Instagram was now important enough to be mentioned in every press story about the meltdown, alongside Pinterest and Netflix. Coworkers, none of whom did that kind of engineering, sent ice cream to the office as support. Sweeney ate several scoops to try to make it through the night, though he accidentally fell asleep multiple times on his keyboard.”

“The infrastructure wasn’t the only problem bubbling up to an intensity the tiny team could barely handle. Spam was everywhere on Instagram. So was troubling and abusive user content, which the community team could no longer finish sifting through in its shifts—and which was starting to appear in their nightmares. Frustration over the financials aside, selling to Facebook might give employees their lives back.”

Excerpt From: Sarah Frier. “No Filter.” Apple Books.

“Systrom gave four reasons. First, he reiterated Zuckerberg’s argument: that Facebook’s stock value was likely to go up, so the value of the acquisition would grow over time. Second, he’d take a large competitor out of the picture. If Facebook took measures to copy Instagram or target the app directly, that would make it a lot more difficult to grow. Third, Instagram would benefit from Facebook’s entire operations infrastructure, not just data centers but also people who already knew how to do all the things Instagram would need to learn in the future.”

Excerpt From: Sarah Frier. “No Filter.” Apple Books.

“So that summer, Zuckerberg directed Javier Olivan, Facebook’s head of growth, to draw up a list of all the ways Instagram was supported by the Facebook app. And then he ordered the supporting tools turned off. Systrom again felt punished for Instagram’s success.

Instagram was also no longer allowed to run free promotions within the Facebook news feed—the ones that told people to download the app because their Facebook friends were already there. That had always brought a steady stream of new users to Instagram.

Another of the new changes would actually mislead Facebook users in an attempt to prevent them from leaving for Instagram. In the past, every time an Instagram user posted with the option to share on Facebook, the photo on Facebook said it came from Instagram, with a link back to the app. Instagram’s analysis showed that between 6 and 8 percent of all original content on Facebook was cross-posted from Instagram. Often, the attribution would be a cue for people to comment on the photo where it was originally posted. But with the change mandated by the growth team, that attribution would disappear, and the photo would seem as if it had been posted to Facebook directly

Excerpt From: Sarah Frier. “No Filter.” Apple Books.

Consolidations in the same industry always involve reduction of competition. The fact that Facebook is a giant company doesn’t make every single acquisition it made illegal or inappropriate. That’s why I don’t get folks are so upset about Facebook’s acquisition of Instagram. I think it’s safe to say that having Instagram at its current size benefits end users, entrepreneurs and small businesses. There is no guarantee that without Facebook, Instagram would have had the same achievement. It’s also worth noting that the FTC, at the time, approved this merger. As a result, why suddenly did this issue become trending again?

Using data to launch private labels isn’t illegal or bad in and of itself

One of the popular themes in this hearing is the use of data from other businesses by big tech companies to launch competing products. Amazon is accused of using data from startups that work with its investment arm and from sellers on its website to launch competing products. First of all, if Amazon violates any confidentiality term to gain illegal access to sensitive data, then yes they should be held accountable. However, I don’t think using aggregate data stemming from activities on its own website to launch private labels is inappropriate or illegal. What do you think Target, Walmart, Kroger or a litany of other retailers do? Where do you think they got intelligence before launching their own private labels? Here is the revenue share by private labels of retailers. The practice went back to several decade. So, why suddenly is it an issue?

Furthermore, even though Amazon has 35%-40% of the US eCommerce, it still has to compete with brick-and-mortar stores. Hence, if you account for physical stores and the whole US retail market, Amazon occupies only 6%, according to Ben Evans. It’s a bit of a Catch-22 situation for lawmakers. Focus on eCommerce alone and it’s not fair. Look at the whole retail segment and Amazon is likely off the hook as they have only 6% of market share. Imagine that as a successful business owner, you were told not to venture in a different segment, how would you feel? You’d probably say: “wait a minute, that’s unAmerican and against capitalism. Why aren’t I allowed to compete in another category just because I was successful in one?”

What I’d have a problem with is if Amazon abuses of its power to promote its private labels without merits. Specifically, if Amazon pushes its own labels which don’t have any positive reviews at all ahead of more established brands with a lot of reviews, then it’s problematic and not in the best interest of consumers. In that case, Amazon’d deserve scrutiny and criticisms.

App Store commissions

I’ll write about this issue in more details later, but here are a few basic points I want to bring up. Every company that plows resources properly into an operation earns the right to make money from such an operation. Even as one of the biggest and richest corporations in the world, Apple should be able to do that too. As a result, when Apple is responsible for manufacturing its own devices and creating the operating systems that include the App Store, Apple earns the right to monetize their effort. It’s unreasonable to expect Apple to run a charity out of the App Store. Whether the 30% or 15% commission is too high warrants a legit discussion, but I strongly disagree with folks who say Apple should just charge developers its cost of running the App Store.

While developers are important, they are just one side of the coin. The other side is Apple customers. Apple needs to ensure that the user experience on the App Store is as pleasant as possible. Otherwise, they wouldn’t sell as many devices and make as much money any more in the near future. That’s why they have guidelines on the App Store. It’s not reasonable to expect Apple let developers do whatever they want when Apple’s brand is on the line. In life, there is no free lunch. Developers shouldn’t expect to leverage Apple’s infrastructure and reach to customers without abiding by their rules. We all know the saying that goes “my house, my rules”, don’t we?

There is a legitimate concern over the inconsistency of Apple’s rule enforcement. The concern is amplified when it comes to select cases in which Apple has a conflict of interest with regard to its own apps. On that front, I do agree Apple should be held accountable and scrutinized by users, developers, media and the authorities.

In summary

The hearing is a waste of time for the most part, in my opinion. There are interesting discoveries revealed by the committee in the documents submitted by the companies; which you can find here, but the format of these hearings needs upgrading and the answers we got today from the CEOs weren’t that meaningful. I do believe that some of the anti-competition claims on big techs should be fleshed out more.

Disclaimer: I own Apple and Amazon stock in my personal portfolio

Weekly readings – 8th February 2020

Spotify: The Ambient Media Company

Behind Amazon’s HQ2 Fiasco: Jeff Bezos Was Jealous of Elon Musk

Macro trends in tech by Ben Evans

The everything town in the middle of nowhere. An interesting piece on how Amazon changed an obscure town

The year startups took over the Super Bowl

Eating honey is more complicated than you might think

Can Lemon-Scented Stations and Billions of Dollars Get Americans Into Trains?

Eating honey is more complicated than you might think

How Andre Iguodala handled his rare NBA sabbatical

A French Photographer’s Portrait of Saigon in 1866

Germany’s overdose of renewable energy. Part 2 of a two-part series on the role of nuclear power in the age of climate change and the case study of Germany.

On Resigning from Google

A great story with rich visual effects on how climate change has affected Norway.

Weekly readings – 26th October 2019

AWS Customers Rack Up Hefty Bills for Moving Data. Cloud spending isn’t as cheap as some may think.

The Heart of a Swimmer vs. the Heart of a Runner

Source: DuckDuckGo

Craftmanship in 1930 Vietnam as Seen in Paris Specialized Municipal Libraries. If you want to see a little bit of how Vietnam looked almost 100 years ago, here is a great article

Jeff Bezos’s Master Plan

Is Amazon Unstoppable?

News tab on Facebook

A great post with usrprising details on the spectacular fall of WeWork