Weekly reading 18th June 2022

What I wrote last week

Interchange and what influences it

Apple and Major League Soccer

Business

($) What Do Chinese Consumers Want? Walmart Can’t Figure It Out. Almost 30 years in the country and decades of experience in this industry, Walmart seems to lose grip in China. The stores aren’t an appeal that they once were. Walmart doesn’t seem to be able to offer what consumers want. Competitors are fierce. For good measure, the tension between America and China shows no signs of abating. Trouble is awaiting the largest retailer in the world in China.

Elon Musk’s regulatory woes mount as U.S. moves closer to recalling Tesla’s self-driving software. I admire Tesla, Musk and everything they have achieved. But I think it’s dangerous to create marketing materials touting full self-driving abilities when the vehicles are nowhere near that capabilities.

($) FanDuel CEO Amy Howe Wants to Help the Sports-Betting Business Grow Up. An interesting read into the market leader of sports betting. TIL, FanDuel had 70% of all sports betting platforms’ revenue generated in the state of Michigan in 2022 through April. Typically, it’s only about 5% of the amount wagered.

Maybe Bob Chapek Was Right. The tumult at Disney continues with the recent departure of Rice, a senior executive. Outsiders may not know the full story of what went down. Perhaps, Bob Chapek was right. Perhaps, it was just another example of how difficult life at the top is for him. Nonetheless, it really doesn’t matter how fair or unfair the criticisms on him are. The fact is that he is the CEO and the stock went down by almost 50%. Right or wrong, it’s on him and his record. I look forward to seeing whether they will adjust their subscriber target in the long run now that they no longer have the rights to the cricket league in India. Some said that Disney might lose 20 million subscribers in India. Others argue that it’s a blessing in disguise as a subscriber pays like 70 cents over there. Hence, losing a bunch of low-paying subscribers may boost ARPU and profitability, a premium in this market. The market’s reaction to a new target, if any, may influence Chapek’s tenure a lot.

($) Amazon CEO Andy Jassy’s First Year on the Job: Undoing Bezos-Led Overexpansion. A fascinating piece on Amazon that is unquestionably favorable to Andy Jassy and much less so to Jeff Bezos. I find it interesting that Amazon seems to shift the blame from Jassy onto Bezos for recent trouble with excessive fulfillment capacity. The founder and former CEO did make the decision to expand the capacity, but this sort of public admission while he is still the Executive Chairman definitely raised eyebrows.

($) One Grocer Wanted to Give Up Plastic. It Got Rotting Bananas. “When one of the best-known supermarket chains in the U.K. decided to remove plastic from its products, it hadn’t anticipated a spike in shoplifting. The zero-plastic drive also produced a series of unintended consequences that demonstrate how difficult it is for any company to shed plastic packaging entirely. When Iceland wrapped bananas in paper bands instead of plastic bags, the fruit rotted more quickly or snapped off. When it packed bread in opaque paper bags, sales fell as shoppers balked at buying something they couldn’t see. When it punched holes in paper bags filled with potatoes to make the contents more visible, the bags ripped. Bacon that isn’t wrapped in plastic quickly discolors, salad leaves wilt and unwrapped cucumbers rot more quickly.

Other stuff I find interesting

($) Biden Administration to Pursue Rule Requiring Less Nicotine in U.S. Cigarettes. FDA estimates that tobacco use costs the country $300 billion in direct healthcare expenses and lost productivity. A study published on the New England Journal of Medicine estimates that lower nicotine level will lead to 5 million additional adult smokers to quit smoking. If mandating a lower nicotine level in cigarettes results in fewer smokers and lower economic damages, FDA should press ahead and exercise their authority, knowing that the tobacco industry will take legal actions to protect their own interests

Downtown S.F. on the brink: It’s worse than it looks. The article goes into why remote work drives folks away from San Francisco and the downstream effects that such a migration can have on the city. I spent a few days in San Francisco last month. At no time did I ever feel safe due to the homeless folks on the streets. My team and I went around a bit by Uber and agreed that some areas were just too sketchy to live. Drivers there were just unbelievable. We had to report one Lyft driver because he literally scared us to death with his reckless driving. The living expense is so high there. One croissant and a small cup of coffee cost me $12, easily double what I’d pay in Omaha. It’s no wonder that white-collar workers moved away whenever they had a chance. When the engine that generates your city’s economy is leaving, it’s a serious challenge that demands different thinking.

Exclusive: inside Apple’s iOS 16 remake of the iPhone’s iconic Lock Screen. One thing you’ll notice from this piece is that the road to this Lock Screen feature started a while ago with work on its neural engine, chip and personalization effort on the Home Screen in iOS14. That’s typical of Apple. Have a product roadmap, put the pieces together and release only the things that work.

Opening a Restaurant in Boston Takes 92 Steps, 22 Forms, 17 Office Visits, and $5,554 in 12 Fees. Why? “The American Dream is besaddled by byzantine regulations. As the report shows, for example, opening a restaurant in Boston is a 92-step process. In Detroit, it’s 77 steps. In Atlanta, it’s 76. The report goes into great detail. That 92-step process to open a restaurant in Boston requires that 22 forms be completed, 17 in-person visits be made to government offices, 12 fees be paid, and nine government agencies be involved, at a total cost in government fees of $5,554. Opening a restaurant in San Francisco requires that 17 government fees be paid at a total cost of $22,648.” Indeed, why?

Stats

There were 31 million cigarette smokers in the US in 2020

1.5 billion users watch YouTube’s TikTok clone every month

14% of the U.S. population lives within rural communities

Apple and Major League Soccer

Yesterday, Apple and Major League Soccer (MLS) announced a deal that would make the Apple TV app the home of all MLS games globally in the next 10 years, starting in 2023. Fans will be able to stream all MLS games, with no blackout dates, through a subscription service only available on the Apple TV App. The League has not yet announced the details of said subscription, but are expected to do so in the coming months. Apple said the subscription would also feature highlights, replays, analyses and other original programming. Furthermore, the partnership will also seek to enhance coverage of MLS teams in Apple News and fans can watch highlights right from the News App.

Subscribers of Apple TV+, which is Apple’s own streaming service, can watch a few games at no additional cost. A limited number of games will be available for free, even to non-subscribers of Apple TV+. MLS season ticket holders will automatically receive a complimentary subscription to the MLS streaming service as an additional perk.

The two parties didn’t disclose the value of this deal, but folks familiar with the matter said that it’s worth at least $2.5 billion in its entirety, approximately $250 million a year. The current deal with ESPN+ is worth $90 million and will expire after this year. It was reported that MLS was hoping to make $300 million in annual revenue due to increasing viewership and popularity. Apart from this deal with Apple, MLS is also talking to a few cable companies over the rights to broadcast some games on linear TV.

Below is what each party had to say about this partnership:

For the first time in the history of sports, fans will be able to access everything from a major professional sports league in one place. It’s a dream come true for MLS fans, soccer fans, and anyone who loves sports. No fragmentation, no frustration — just the flexibility to sign up for one convenient service that gives you everything MLS, anywhere and anytime you want to watch. We can’t wait to make it easy for even more people to fall in love with MLS and root for their favorite club.”

Eddy Cue, Apple’s senior vice president of Services

Apple is the perfect partner to further accelerate the growth of MLS and deepen the connection between our clubs and their fans. Given Apple’s ability to create a best-in-class user experience and to reach fans everywhere, it’ll be incredibly easy to enjoy MLS matches anywhere, whether you’re a super fan or casual viewer.”

Don Garber, MLS’s commissioner

Why MLS picked Apple?

In my opinion, it’s about reach and accessibility. A unique part of this deal is that Apple secured the streaming rights globally, not just within the US; which is very different from the usual practice of rights being given over select geographical areas. Apple is one of, if not, the most global and recognizable brands in the world. Its Apple TV app is available on many types of devices, not just those that run on Apple operating systems. By working with Apple, MLS has a partner that can bring the game to the global audience instantly. There is no need for MLS to set up its streaming service. It’s not an easy task, especially for a global audience. With this deal, MLS is responsible for generating content and Apple will take care of the distribution. Moreover, the Apple TV app is native on Apple devices and doesn’t require any more installation. Fans can just head to the app and subscribe to the MLS service; which the Commissioner already alluded to in his remark.

The second reason is reach. Everything Apple does is widely covered and followed. This blog entry is one example. Apple can use its massive following and Marketing expertise to increase the awareness of MLS and help the League become more global. I have no doubt that we’ll see more ads from Apple about this deal, more mentions during events & earning calls, as well as more articles from news outlets, fans and bloggers. From the League perspective, instead of running Marketing campaigns in each part of the world, either by itself or partnering with an agency, I imagine that leveraging Apple is easier and more effective.

Why Apple partnered with MLS?

I find this comment from Don Garber, the Commissioner of MLS, very interesting

This is a minimum guarantee. It’s not a rights fee,” Garber said of the non-traditional deal. “…So if we exceed the minimum guarantee, then we share in the upside in that guarantee. If we’re able to sell our linear rights for what we hope and expect to sell them for, then we would even exceed our expectations.

Source: Tennessean

The new MLS subscription service is only available through the Apple TV app. Hence, Apple will be the one collecting the subscription dollars upfront and grow its Services revenue, at least on the surface. Based on the comment from the Commissioner, I figure no matter how much revenue the MLS streaming service brings in, Apple will pay the League at least $250 million a year. Past that figure, the tech giant will be able to take a share of the upside. It’s clear that this arrangement will do two things: 1/ Apple has something exclusive to sell to its customers; 2/ MLS will have a partner incentivized to promote the League globally as much as possible. With a lot of cash and 73% in Services’ gross margin, I think Apple can afford the $250 million figure promised to MLS.

If an MLS subscription costs $100/year or less than $10/month, Apple will need at least 2.5 million subscribers around the world for it to actually make any money from selling the service itself. Given the current awareness of MLS, especially to countries outside the US, is 2.5 million subscribers an attainable threshold? Unlikely in my opinion, but over a long term, who knows? The financial success of this partnership for Apple hinges on the future popularity of MLS. There are a couple of factors that may come in handy:

The first is that the World Cup 2026 will be hosted by Canada, the US and Mexico. As the world’s biggest soccer event, the World Cup will undoubtedly raise the awareness of soccer as a sport and of MLS. Currently having 28 teams, the League will add one more next year and plan to eventually feature 32 teams in the near future. The more local teams there are, the more interest such teams will generate among communities.

The second factor is the arrival of superstars who make their names in Europe and have massive global following. We already saw household names join the MLS in the past, including David Beckham, Thierry Henry, Zlatan Ibrahimovic, Wayne Rooney, Frank Lampard, Steven Gerrard and David Villa. Recently, Giorgio Chiellini, a popular Italian veteran, signed a deal with LAFC. But MLS would rise to a whole new level if it could acquire superstars such as Messi or Suarez. These players did it all in Europe and are already rumored to play in the US soon due to the media & business landscape as well as the Latino fanbase in the country. The arrival of legends such as Messi would be an instant boost to the MLS and its streaming service.

Apple wants to keep existing customers loyal and appeal to new ones. Sports are a great way to consumers’ heart and Apple seems to agree. Before the partnership with MLS, it struck a deal with Major League Baseball to broadcast games on Friday nights. There were reports that claimed Apple already secured rights to NFL games on Sunday nights. All this sports content will enrich the Apple digital ecosystem and help the company make more money. Two possibilities that I can think of:

  • Apple TV+ is natively available on Apple devices through the Apple TV app. Android users can also access the streaming service, but only through browsers. That’s inconvenient. Great sports content on Apple TV+ can give a nudge to on-the-fence Android users to switch to Apple devices. Whatever money the company lost on this front can be made up by higher margin services (Apple Care, Ads, iCloud, payments, etc..) and slightly more expensive devices
  • At $4.99/month, Apple TV+ is one of the cheapest options on the market. With more games in the library now, Apple can make a case to raise the subscription price. Even a $1 increase could lead to millions more in revenue

From my perspective, this is a good partnership for both parties, more so for MLS than Apple, given its current level of popularity globally. But Apple is known for its patience and long-term planning. The company must have a plan in mind and I am curious to learn more about it.