Weekly reading – 31st July 2021

What I wrote last week

I wrote down a few thoughts on Netflix

Business

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

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

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

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

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

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

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

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

What I found interesting

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

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

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

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

Stats that may interest you

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

Apple TV+ has 3% market share

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

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

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

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

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

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

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

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

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

Disclosure: I have a position on Disney and Netflix.

Take-aways from the latest interview of Disney CEO

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

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

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

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

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

Source: Credit Suisse 23rd Annual Communications Conference

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

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

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

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

Source: Credit Suisse 23rd Annual Communications Conference

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

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

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

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

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

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

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

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

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

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

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

Weekly reading – 5th June 2021

Business

Sweetgreen Bet Big on Naomi Osaka. Then It Doubled Down. As the world becomes more divided nowadays, celebrity endorsements come with a risk that companies have to make uncomfortable decisions at times. This is one of those moments for Sweetgreen and personally I am happy that they support Osaka.

Self-Driving Cars Could Be Decades Away, No Matter What Elon Musk Said. If a company or an executive claims that their company’s bright future relies on self-driving cars, take it with a big grain of salt and ask a lot of questions because that future is highly uncertain and can be decades away.

Apple’s new App Store guidelines put scammers and bounty hunters on notice. Apple just did themselves and almost everyone else a favor by being more detailed and specific about their App Store guidelines. A major criticism of Apple and the App Store is that their guidelines are too ambiguous and not enforced equally. That’s a fair criticism and since Apple wants to hold a complete unchallenged power over the App Store, they can’t expect that we expect nothing, but perfect from them. I doubt this latest development will quell much the frustration by developers, but it’s a positive step in the right direction

An interesting chat between Kara Swisher and Margrethe Vestager on issues such as a global tax, court cases against big techs and potential remedies towards the oversized dominance of the likes of Apple.

Netflix debuted an online shop that sells merchandise related to their hit shows such as Lupin. This is a natural extension of their business. When some of their shows are fan favorites and garner enough following, why not capitalizing on such popularity? After all, that’s what Disney does. You watch Marvel or Disney movies and visit the theme parks for other experiences. I don’t think this is so much about being on level terms with Disney. Instead, this is about generating more margin and revenue.

What I found interesting

Jordan, Russell, Kareem, even the King of Pop — the astonishing mentors who shaped Kobe Bryant. Everyone wants to be like Kobe, but are they ready for the sacrifices and solidarity like Kobe was? Are they willing to go above and beyond for their obsession like Kobe?

Eddy Cue On Why Spatial Audio Is a Game-Changer

Shedding More Light on How Instagram Works. According to this post from Instagram, it uses a lot of data (they call it “signals”) to determine what content you get to see. There are two sides of this. On one side, it can be convenient and good that you get to see more of what you like. On the other hand, it means that Instagram or Facebook knows a lot about you. Had Facebook had a better track record in terms of privacy in the past, it wouldn’t have been a concern. The reality is that I am not sure users really use Facebook’s platforms because they are trustworthy. It’s likely because Facebook owns the biggest platforms in the world and users only use them out of convenience. Nonetheless, appreciate posts like this one

The World’s Northernmost Town Is Changing Dramatically

How the wealthiest in America avoid paying income taxes

In 2011, a year in which his wealth held roughly steady at $18 billion, Bezos filed a tax return reporting he lost money — his income that year was more than offset by investment losses. What’s more, because, according to the tax law, he made so little, he even claimed and received a $4,000 tax credit for his children.

Stats that may interest you

Solar makes up 4.5% of the US’s electricity, up from 0.1% in 2010

Passenger EV sales are set to increase sharply in the next few years, rising from 3.1 million in 2020 to 14 million in 2025.

Weekly reading – 24th April 2021

What I wrote last week

On Apple’s new product: AirTag

Apple TV+, Netflix and the battle between Walmart and Amazon

Business

Google used ‘double-Irish’ to shift $75.4bn in profits out of Ireland. It’s good to know that 2020 was the last year that the “double Irish” loophole could still be exploited. I am curious to see the impact that the phase-out has on US corporations.

WSJ’s short profile of Korea’s “King of Ramen”

AirTag location trackers are smart, capable and very Apple

The Future of Apple Podcasts

Etsy SEO: How to Optimize Your Shop & Listings for Search

How Netflix and social media helped F1 buck a global sports sponsorship slump. F1 is an extraordinary sport and deserves to be the pinnacle of motorsports around the world. If you look below this entry, you’ll see a graphic showing how F1 cars can go into corners at a speed that we travel on a highway. On the straights, F1 cars can hit 360kmh. The technology that goes into building these cars and the skills that go into driving them are the best in the world. Yet, I still feel that F1 isn’t as popular as it should be. “Drive to Survive” and the resilience shown during 2020 really helped the sport become better known

What I find interesting

Typography at U7 station in Berlin

You can pay at Whole Foods Market with your palm now. While it is incredibly cool and convenient, I don’t think I will jump at the chance to use it soon. Amazon isn’t really known for their privacy practices. I am not too willing to give away my biometrics to them yet.

F1 cars can slow down by 144kmh in 1 or 2 seconds and carry over 150kmh into corners. Just think about that for a second. These cars drive into cars at the speed that is often the top you can reach on the highway

Source: F1

Stats that may interest you

Morning Brew has 3 million subscribers. It’s amazing what you can do with great writing skills and consistency

iPhone 12 models accounted for 61% of US iPhone sales in fiscal Q2 2021

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

Apple TV+ has the highest IMDB ratings for content

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

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

Walmart vs Amazon

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

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

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

Netflix recorded slower growth but saw 2x growth in FCF

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

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

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

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

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

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

Weekly readings – 15th August 2020

What I wrote last week

I wrote a bit about Epic Games vs Apple, Goldman Sachs’ inroad further into consumer credit card world and the potential departure from California of the likes of Uber & Lyft

A historic day for America when Kamala Harris was named as Biden’s Vice President Candidate

My thought on Disney’s latest quarter

Business

Horace Dediu wrote a blog post answering some questions on Apple’s cash strategy

A long and informative deep dive into TikTok and what makes it great

Another deep dive by Turner Novak on Pinduoduo

Nick Sleep on Costco

Meet the Woman Who Got Joe Rogan and Michelle Obama to Spotify

Netflix Business Model & Economics 

A thread on why Avalara has real competitive advantages

Technology

Here’s why Apple believes it’s an AI leader—and why it says critics have it all wrong

How the government’s new real-time payments system could transform commerce

Apple wins a Patent for a Possible Dual Display MacBook Supporting a Virtual Keyboard & more

A potentially life-changing technology for visually-impaired folks

What’s going on with Apple Maps

What I find interesting

An inside look at a data analytics firm that Mike Bloomberg is using to help Democrats

The 19th-century entrepreneur who pioneered modern ice cream

A very long and interesting post on the bombing of Hiroshima and what was happening at the time based on recollections of a few survivors

Giant American Cars Don’t Belong on the Streets of the Future

How Taiwan’s Unlikely Digital Minister Hacked the Pandemic

Weekly readings – 7th August 2020

What I wrote last week

Uber’s latest quarter

Apple’s acquisition of this promising fintech startup from Canada

Business

Inside Netflix’s Quest to Become a Global TV Giant

US citizens increasingly moved to Canada through its Express Entry program

Content creators on YouTube that no longer rely on advertising dollars on the platform grew 40% between Jan and May 2020

Why Microsoft wants Tiktok

A sensible piece on Amazon, its private label and the antitrust issue that it has to deal with

Eugene Wei’s latest essay is on TikTok and it’s good

ARK’s latest white paper on SaaS

How Tim Cook has molded Apple into his own version, not Steve Jobs’

Technology

Apple secured a new patent that could equip Apple Watch with odor sensor technology

What’s the Big Deal About Revit? Understanding the Role of Autodesk Revit in Architecture, Engineering, and Construction

Other stuff that I think is interesting

Inside look at CloudKitchens

Bill Gates’ conversation on Covid-19

Drive To Survive Season 2 is a surprisingly good series

I am an F1 fanatic. I have been following the sport for more than 10 years. I also wrote about it multiple times on this blog. Personally, Formula 1 appeals to me with its unpredictability and its “nerdiness”. A lot of elements go into a race weekend, including top class engineering, data analytics that powers strategy and a split-second decision to deal with the changing elements in a race. Despite having races in 21 countries in the world, I feel that somehow it’s still a foreign sport to many. Not a whole lot of folks that I know follow the sport. Those who do developed a strong love for it like I do.

That’s why I was pretty excited about Drive To Survive Series – Season 2 by Netflix. To be honest, I didn’t watch the first season because my favorite team, Ferrari, and its rival- Mercedes, weren’t featured. The 2nd season showed that the streamer was given an unprecedented access to the paddock and teams. Cameramen followed drivers and team principals to their personal homes. Behind the scene footage where access was normally restricted was available. Folks who were interviewed gave answers that would have made significant headlines had they been published at the time. Watching it made me miss F1 even more than I do now. Like all other sports, F1 has been put on hold because of COVID-19

I do think that the series will bolster the popularity of F1 globally. I have seen positive reviews on Twitter regarding the 2nd season. If you run out of favorite shows to watch, I highly recommend it.

Netflix’s change in view accounting and a misleading use of Google Trends

This week, Netflix dropped its latest earnings report. There are a lot of positive announcements from Netflix and kudos to them for weathering the rising competition from a plethora of streamers, so far. Nonetheless, there are a couple of notable points that I am either intrigued by or in disagreement with.

How a view is counted

Netflix used to register a view whenever a user passed a 70% of a show or a movie. Recently, the company changed that policy. According to the latest earnings report, whenever a viewer reaches a two-minute mark, it counts a view.

Source: Netflix

Netflix communicated the change in a tricky and inconspicuous manner. The explanation on the two-minute mark only came in the footer; which certainly isn’t where readers’ attention focuses on.

Source: Netflix

As you can see in the last sentence in the screenshot above, the change in the view accounting usually results in an increase in view because of obvious reasons. I don’t believe two minutes is enough to determine the intention of the audience. It is not uncommon that viewers watch 20 minutes of a show or a movie before leaving. If Netflix thinks that 70% is too high a standard, 40% or 50% would make more sense than the new implemented policy.

Using Google Trends to compare The Witcher with Mandalorian

In the Competition section of the report, Netflix dropped a Google Trends screenshot that showed interest in its currently flagship show The Witcher, Mandalorian, Jack Ryan and The Morning Show in the last 90 days worldwide

Source: Netflix

First of all, I am not sure this is an apple-to-apple comparison due to the difference in availability. Disney Plus is only available in US, CA, Australia, New Zealand and Netherlands. Even though Prime Video is supposedly accessible worldwide, while I was in Vietnam, I couldn’t watch many shows on the platform despite my membership.

Netflix said that even if Disney+ were global, the results wouldn’t be much different, citing the following result on Google Trends

I wouldn’t make that claim with such a degree of certainty. Netherlands is just a small country in Europe with about 17 millions in population. The viewership and interest in that country doesn’t equal to those worldwide.

Furthermore, the shakiness of the comparison can also come from the selection of keywords. Since The Witcher or Witcher is the name of a video game released in 2017, neither of the two keywords isn’t exclusive to the show on Netflix. Unfortunately, Google Trends doesn’t offer a feature that can clearly separate the show and the video game. The best that we can do is to filter the results by categories. I tested it out by comparing the keywords: Witcher, The Witcher,

As the screenshot shows, there is a big different between “Witcher” and “The Witcher”. The gap is even starker when “Netflix” is added to the search terms. If we set “Art and Entertainment” as the category, the picture will look a bit different

The Witcher/Witcher keywords had a spike on 21st December 2019, one day after the launch of the Netflix show while Mandalorian hit its peak on 28th December 2019, one day after the season finale. The difference between the yellow line and the red line is closer when we look at “Art & Entertainment” alone than when we look at “All categories” which may likely include the effect from The Witcher video game.

Now, the result above still doesn’t offer the full picture thanks to the difference in geographical availability, Let’s look at the US, two markets where every show is available

If we look at the United States alone for All Categories, it looks more favorable for Mandalorian. When “Art & Entertainment” is applied, it fares even better for Mandalorian

Here are the results for Canada

What about Australia?

My point is that there are several factors that affect how the search terms are presented on Google Trends and how results should be interpreted. I don’t have an idea on how the competing shows actually fare. I do believe that the way Netflix presented the information and data in its report is misleading at best.

Disclosure: I have Disney and Apple stocks in my portfolio.