Concern over Facebook’s new privacy-focused vision

A few days ago, Mark Zuckerberg shared with the world his privacy-focused vision for Facebook moving forward. I understand that it may make sense strategically for the company, but I have real concerns over the feasibility of the strategy.

Lack of trust

Facebook has been littered with scandals for the past two years. The trust between the blue brand and users isn’t particularly at its all-time high. There have been documented evidence on the exodus of users from Facebook or the significant decrease in activities. If the trust is already shaky, why would users trust Facebook with every aspect of their life by using their proposed super app? (The super app concept is similar to WeChat, which users can use to do many things while on the platform such as booking movie tickets, paying bills, transferring money to friends and families…). If we can’t trust Facebook with just daily communication, how can we entrust it with more aspects of our life? If you can’t trust a dentist to treat your teeth, would you trust that dentist if he said he could fix your eyes?

The audience

I think one of the reasons why WeChat is successful is because of the target audience. Coming from that part of the world, I can say from personal experience that we Asians tend to not care as much as Western audience about privacy. I think there is a reason why WeChat hasn’t been as successful overseas as it is in China. If it were marketed to Western audience, given its relationship with the Chinese government and Western users’ concern over privacy, I don’t think it would be a triumphant effort. Hence, to convince Western users to use Facebook for everything, the trust has to be pretty solid. It’s not there now for sure.

Regulatory hurdles

Facebook has attracted unwelcome attention from lawmakers recently. And for a good reason. Even if they had done nothing wrong, which is definitely not the case, I suspect that the road to the super app vision wouldn’t be without robust challenges from the regulatory perspective.

Essentially, it’s all well and good for Facebook to change its stance on privacy. However, the trust isn’t there. I would love to see more concrete actions to transition from a company whose more than 95% of its revenue is from ads to a company that values privacy first. I am not a believer at the moment since Facebook has used up the rope we gave them already. If they want us to trust them again, they have to do it the hard way. And I think they have to hurry as well as the world won’t stand still for them. If this is the vision that makes business sense, others will go for it as well.

If they are committed and succeed in the future, kudos to them. Until then, I choose to remain skeptical of the vision.

Facebook’s privacy-focused vision

Yesterday, Mark Zuckerberg released a blog post on a “privacy-focused vision” that centers on:

Private interactions. People should have simple, intimate places where they have clear control over who can communicate with them and confidence that no one else can access what they share.

Encryption. People’s private communications should be secure. End-to-end encryption prevents anyone — including us — from seeing what people share on our services.

Reducing Permanence. People should be comfortable being themselves, and should not have to worry about what they share coming back to hurt them later. So we won’t keep messages or stories around for longer than necessary to deliver the service or longer than people want them.

Safety. People should expect that we will do everything we can to keep them safe on our services within the limits of what’s possible in an encrypted service.

Interoperability. People should be able to use any of our apps to reach their friends, and they should be able to communicate across networks easily and securely.

Secure data storage. People should expect that we won’t store sensitive data in countries with weak records on human rights like privacy and freedom of expression in order to protect data from being improperly accessed.

Be that as it may that this vision can bring business and strategic benefits, meaning that Facebook has a reason to follow suit. Nonetheless, I have nothing, but skepticisms about this vision.

First of all, the majority of Facebook’s revenue comes from ads. By majority, I meant 98.5% of their revenue in 2018 comes from ads

Source: Facebook

When something is 98.5% of you, any claim that you will do something threatening that 98.5% part tends to raise genuine concerns about its legitimacy.

Second of all, Facebook’s track record on keeping its promise isn’t that great. For the last two years, it will be a hard ask to find a tech company that is involved in more scandals than the blue brand. I came across this disturbing article from Buzzfeed on Facebook. Here is what it has on decision-making at Facebook

Zuckerberg and Chief Operating Officer Sheryl Sandberg do not make judgment calls “until pressure is applied,” said another former employee, who worked with Facebook’s leadership and declined to be named for fear of retribution. “That pressure could come from the press or regulators, but they’re not keen on decision-making until they’re forced to do so.”

Buzzfeed

On Facebook’s attention to privacy

One former employee noted that Facebook’s executives historically only took privacy seriously if problems affected the key metrics of daily active users, which totaled 1.52 billion accounts in December, or monthly active users, which totaled 2.32 billion accounts. Both figures increased by about 9% year-over-year in December.

“If it came down to user privacy or MAU growth, Facebook always chose the latter,” the person said. 

Buzzfeed

On their denial to admit problems:

Other sources told BuzzFeed News that Facebook executives continue to view the problems of 2018 fundamentally as communication issues. They said some insiders among leadership and the rank and file could not understand how Facebook had become the focus of so much public ire and floated the idea that news publications, who had seen their business models decimated by Facebook and Google, had been directed to cover the company in a harsher light.

Buzzfeed

On a new feature called Clear History:

“If you watch the presentation, we really had nothing to show anyone,” said one person, who was close to F8. “Mark just wanted to score some points.”

Still, nine months after its initial announcement, Clear History is nowhere to be found. A Facebook executive conceded in a December interview with Recode that “it’s taking longer than we initially thought” due to issues with how data is stored and processed. 

Buzzfeed

By now, you should see why I am skeptical of Facebook’s new vision. We all have to take a side and so does Facebook. It just happens that taking advertisers side means Facebook is not on ours as users.

Apple’s strategic switch

Disclaimer: I do own a few Apple stocks, but it’s nothing major and this post is just to share my observation of Apple. As a fan of business strategy, I have been a fan of the company and interested in how it performs amid the concerns after the letter to shareholders on 2nd January 2019.

Yesterday, Apple announced their Q1 earnings. A few notable points from their announcement and earning call:

  • Apple no longer reports units sold across their business segments
  • Overall, Apple recorded $84.3 billion, down 5% year over year
  • Products gross margin was 34.3% and Services gross margin was 62.8%.
  • iPhone revenue dropped by 15% year over year
  • Services revenue in Q1 was $10.9 billion, a 19% YoY increase. Service revenue grew from $8 billion in calendar 2010 to $41 billion in calendar 2018, allegedly on pace to reach $50 billion in 2020
  • Mac revenue was up 9% while iPad revenue was up 17%
  • Wearables, home and accessories revenue grew by 33% to $1.8 billion
  • There are 50 million paid Apple Music subscribers, up from 40 million reported in June 2018
  • Apple reported a base of 900 million installed iPhones, out of 1.4 billion active devices in total from Apple
  • There are 360 million paid subscriptions across Services portfolio, an increase of 120 million versus a year ago.
  • This quarter saw 1.8 billion transactions through Apple Pay, twice the volume recorded in the same quarter a year ago
  • In Germany, there are more Apple Pay activations in one week than for Android in one year
  • “Revenue from cloud services continues to grow rapidly with year-over-year revenue up over 40% in the December quarter. And readership of Apple News set a new record with over 85 million monthly active users in the three countries where we’ve launched the United States, the U.K., and Australia”.
  • Ending Q1 2019, Apple cash stands at $244 billion while net cash is at $130 billion

I am a big believer in the notion that business models need to be adapted to the changes in the business environment. No business model could be effective while staying still over the years, especially in the fast-changing world that we live in today. Apple should be no exception and from the numbers reported, it seems to me that they are making changes.  

For years, the bulk of Apple’s business has come from hardware which is differentiated by its exclusive software, especially in the case of iPhone. iPhone revenue has made up approximately 60% of Apple’s turnover. However, the luxury smartphone market has reached the maturation point. iPhone unit sale growth has been either minimal or flat for quarters. Greater China market, which makes up 20% of their iPhone revenue, has boasted challenges to Apple, particularly in 2018. Their iOS isn’t as appealing to Chinese users as it is to users in other parts of the world while competitors such as Huawei and Xiaomi offer alternatives with more or less same features at a lower price. The macroeconomic conditions in China and the trade war aren’t helpful either.

The growth in iPhone revenue has come largely from the price hike which lengthens the upgrade cycle and puts a limit on how much Apple can reach out to potential users. Not everyone can afford those pricey phones. Lowering the prices isn’t the solution. Firstly, Apple is a luxury brand. Lowering prices may leave significant damages to its brand power. Secondly, cheaper phones will require substantial changes to its operations, including supply chain, distribution and Sales & Marketing.

All the signs point to the fact that too much dependence on iPhone is no longer sustainable for Apple moving forward. Enter Services.

Services has been a bright spot amid concerns over iPhone revenue for the past 2 or 3 years, growing at a 20% annual clip. Put that in perspective, their Services revenue this quarter alone is $10.9 billion, almost equal to Netflix’s revenue in 3 quarters in 2018 while Facebook Q3 revenue was about $13 billion. Instead of making money from devices, Apple is betting on users keeping devices longer and paying consistently and more for services. And why not? If the users tend to hold on to devices longer, it makes sense to generate more money from their activities. Plus, margin from Services is substantially higher than that of Products.

And they have been doing a good job. Apple Pay transactions reached 1.8 billion this quarter, 100% YoY increase. Revenue from cloud went up by 40%. The number of paid subscriptions grew by 50% year over year and Apple Music has added 10 million users, reaching the 50 million mark and achieving a 25% growth, since June 2018.

As of June 2017, developers earned $70 billion from App store since its launch in 2008. As of January 2019, the figure went up to $120 billion. Moreover, we are about to see their investment in original content as their streaming service is reportedly going to be live this April.

In summary, Apple seems to be heading to the right direction strategically in my opinion, given the changes in the environment they are operating in. I think the following guidance in the next few quarters will continuously be lower than analyst expectations as the reduction in iPhone revenue may not be sufficiently offset by the growth in Services yet. There is a chance that Apple won’t have the same revenue level as they had at the peak of iPhone-dominated era.

Nonetheless, I think the company is far from the demise alleged by some after a letter to shareholders on 2nd January 2019. They generated $84 billion in revenue and almost $20 billion in net income in 90 days! Instead, the change to be a Services company may be better for the company’s health.

New Netflix price surge. Should Netflix livestream sports?

Yesterday, Netflix announced their new price structure. Per WSJ:

Netflix will increase the price of its most popular plan 18% to $13 a month from $11. That plan allows users to stream from two screens at the same time. The most basic plan, which allows a single stream in standard definition, will go up one dollar, or 13%, to $9 a month. The new rates will go into effect immediately for new customers and be applied to the accounts of existing customers in the next few months, according to a person familiar with the plans.

The increase in price is not really surprising in my opinion. Netflix has been investing heavily in original content. WSJ reported that the investment would amount up to $12 billion this year. Netflix needs to enlarge its war chest and the additional revenue from the new prices will help with that. It doesn’t hurt that Netflix has some wriggle room to up its prices, according to Priceintelligently. Additionally, as some content owners such as Disney or Warner Media plan to launch their own streaming services, Netflix will likely have to pay more to retain popular shows or movies.

But there is only so much room for increase in subscription prices. If Netflix pushes too hard, they may lose viewers. Consumers will have more options with the arrival of Disney, Warner Media and NBC, in addition to major current players such as HBO, Amazon, Hulu and Showtime. A normal user should not be expected to pay so much for subscriptions every month. Netflix may need to find another area to grow its user base and revenue.

Should Netflix go for sports?

Sports is a hugely important part of our life and hence it is important to businesses that want our money and attention. To see how important sports become to social media and streaming services, here are a few headlines:

The last headline is very interesting. Coming from Vietnam, I can tell you that football (as millions of people in the world outside the US call it) is a religion in my country and hugely popular in that region. Premier League, in particular, attracts football fans in Vietnam in a way that few leagues do. We have to or at least, used to pay for cable TVs to be able to see the games. The service is subpar, and the fees are slightly cheaper than a Netflix subscription. Vietnamese users pay around $8-9 a month for a Netflix subscription while a cable subscription costs around $5-7. If the fans can stream games from their laptops/computers or project games onto TV through Netflix, it will be a game changer. Fans will strongly consider the service, especially with hours of shows and movies as well.  

But does it make sense for Netflix to do so from a business and financial standpoint? Let’s run a scenario.

Together, Vietnam and Thailand have 165 million people in population. The total number of Netflix subscribers in the two countries are just 500,000 (300,000 for Vietnam and 200,000 for Thailand). If we just assume that 40% of the two countries’ population are young from 15 to 40 years of age, fitting the target demographic, I presume, for Netflix, the Total Addressable Market (TAM) is around 66 million for Vietnam and Thailand. I don’t have the number of subscribers in Laos and Cambodia, but if we apply the same assumption to those countries, the TAM is 9.2 million potential subscribers. For the four countries, the TAM is around 75 million.

If a subscriber is worth $8/month and Netflix gains around 100,000 subscribers a year each in Vietnam and Thailand, as well as 50,000 each in Laos and Cambodia, the total revenue can be around $230 million in 3 years, $30 million less than what Facebook pays for its exclusive rights. Also, the total number of subscribers should be at least 1.7 million, barely a fraction of the TAM mentioned above (75 million).

If we increase the subscription price by $1 in the original scenario, the revenue will be around $259 million, almost as much as what Facebook paid.

If the number of subscribers in that scenario goes up by 30%, the revenue in 3 years will be around $300 million and the subscriber count in 4 countries for Netflix will be around 2.06 million, still a small fraction of the TAM.

Of course, all of the above are assumptions which can be way off the mark, but to me, it seems that it is an opportunity there for Netflix. Besides the financials, gaining more subscribers can make Netflix more valuable due to network effect and give them more data about the users. Netflix paid $100 million to keep Friends on its network for a year. Given that amount and the potential upside of providing sports to international markets, I believe Netflix should give it a try. Plus, it can’t afford to see competitors add sports to their selection without doing anything.

I admire the consistency and focus of Netflix. They have been very consistent on their long-term view as a video streaming service. Nonetheless, the situation may necessitate some changes in the future.

Informative newsletter and tech sources

Where we get information matters. As there is so much information/noise floating around, a good curator and/or a great content provider has become increasingly important, at least to me. Here are a few of my go-to sources every day. Keep in mind that these are related to business and technology, two areas I am invested in. 

CBInsights

It offers deep-dive reports into technology and business. There are many free reports that can be downloaded or consumed immediately on site. What I like about CBInsights is that their researchers really roll up their sleeves in their work and offer great insights, sometimes from a surprising angle. Their use of visualizations such as tables, graphs or mind maps is pretty rad as well

The Hustle

It’s a newsletter on business and tech. Apart from offering what news you should know at the beginning of a day, The Hustle has a great team of copywriters. Their witty and funny writing is what hooks me up. The newsletters don’t have the same level of deep investigation as CBInsights does, but if you want a skim of what is going on out there in business and technology, it’s pretty good. Oh, if you want to do some B2B marketing, it can be a promising channel. I have seen Airtable, Microsoft and Salesforce sponsored content by The Hustle

Morning Brew

Same as The Hustle. I consider The Hustle a tad better & funnier. Still it’s worth giving Morning Brew a try

Ben Evans newsletter

His newsletter is on a weekly basis. It’s a collection of articles in technology and business that he thinks are important. 

Ben Thompson’s Stratechery

It’s a highly regarded website on strategy and technology. There is a paywall to his daily content, but his weekly content, I believe, is free. You will learn a lot from Ben as many others, including some famous names in technology, do. 

ARK

A friend suggested this one to me a few weeks back. I am still pretty new to it. But if you are a fan of cryptocurrency, AI, machine learning, industrial innovation…it is worth a read

Coworking space + Managed Services?

I have been thinking about the prospect of marrying the two concepts: coworking space and managed services?

Coworking Space

Coworking space shops help individuals, startups and even big corporations operate without worrying about renting office, meeting rooms, equipment, or Internet. Members can also rely on these shops for tasks such as mailing, forwarding or receiving guests at reception desks. The main premise of coworking space is to help businesses focus on what matters by outsourcing low-ROI tasks to the host and to get off the ground with as low a fixed cost as possible. Moreover,  there is another marketed value proposition that coworking space facilitates random interactions and access to like-minded individuals, potential team members or investors. It may be true. Some try to offer added values such as workshops or consulting. Nonetheless, such propositions are commoditized now. There is no differentiation among coworking space providers. If we follow the continuum of resource sustainability by Jeffrey Williams, coworking space seems to fall into fast-cycle bucket. In that bucket, the only way to compete is fast time-to-market

Continuum of Resource Sustainability

Source: How sustainable is your competitive advantage? – Jeffrey Williams

Managed Services

Think about managed service providers as your extended IT department. Their primary premise is the same as coworking space providers. Managed service providers help companies to manage mundane & low-ROI tasks such as patching, updates, monitoring, installing and to start a business with a low CAPEX. Instead of spending a lot of money and time procuring hardware and setting up your own environment, you can go to Managed Serviced Providers and everything can be ready in a matter of hours or a day. Additionally, your developers don’t have much experience in migrating to public cloud? These providers will assist you. You want your developers’ valuable time on real innovation and coding instead of managing public cloud environments? These providers will do so for you. While these public cloud providers have incredible global footprint and a variety of services, they don’t necessarily offer great customer services. Unless you are willing to pay for technical assistance packages that can run up to $15,000/month, there will be little hand-holding. That’s why managed AWS market has a CAGR of 13.9%

Why not combining the two?

The two services share the same primary premise. Most startups and businesses nowadays leverage IT to gain competitive advantages and meet customer needs. Chances are that many startups or small businesses at coworking space leverage Internet and the cloud extensively. If coworking space shops can bundle managed services with their memberships, it will create more value and appeal more to members. If a coworking space can have at the minimum one or two certified Azure or AWS engineers in-house to help guide startups with their infrastructure, wouldn’t that be something of value?

In my mind, it makes sense to offer an infrastructure-level service that every Internet startup will need. Eventually, if enough coworking space providers offer managed services as well, there will still be no differentiation. The keys are time-to-market and the art of bundling and pricing. It’s quite intriguing to not see many coworking space shops do so. Perhaps, I am missing something. Or not.

Sinemia and MoviePass

If you live in the US and are a fan of watching movies at cinemas, chances are that you have heard of a company called MoviePass. It is famous for its unprecedented business – $10/month for one ticket every day. The company has suffered a great deal financially and operationally for its business model, including an urgent financing round to keep its servers running, downtimes, unimpressive customer services and frequent changes to its pricing.

In the subscription world, the mandate is that once a user subscribes, the more the subscriber consumes services/content, the better and marginal cost is trivial. Take Netflix for example. After a successful subscription, a user can watch as many movies and for as many times as possible. Netflix takes in minimal marginal costs (probably for servers, storage and networking) for every time a movie is watched. In the case of MoviePass, it’s not the case. Every time a ticket is dispensed, MoviePass pays the cinemas either the full amount of the ticket or the majority of it. Slap on it the cost of marketing, financing and operations and the business loses money.

How does MoviePass make money in that case? I suspect that MoviePass prioritizes growing its user base to the point that it is big enough for the company to convince cinemas to cut its a much better deal. Advertising can be another avenue.

The failure of MoviePass is also from the customer segmentation perspective. We moviegoers differ from one another in our consumer behavior. Some go to cinemas every week, some go for only blockbusters and some only do so once in a while. The difference in behavior requires multiple offerings from MoviePass. The less frequent users don’t feel motivated to keep a subscription every month. Movie junkies who go as many times as possible will bleed the company dry. There are some users who look at the release schedule, subscribe for only one month in which I can watch movies I like and then unsubscribe, myself included. Such users don’t offer much value to MoviePass as they don’t, ironically, consume enough to contribute to MoviePass’s value as a company.

The “one-size-fits-all” model that MoviePass is famous for doesn’t take into account any user behavior. Unsurprisingly, it failed.

Sinemia today announced an unlimited plan. For $30 bucks, users can get a ticket every day and advanced bookings are allowed (not possible with MoviePass). The difference obviously is a higher price tag that comes with the plan. I suspect that even at $30/month, it is still a money-losing deal for Sinemia but it is less damaging than a $10/month plan. Moreover, Sinemia has 5 different plans now. Each appeals to a different segment of users.

Sinemia

To discourage users from unsubscribing early, Sinemia enforces an initiation fee for monthly-based plans. That way, users care more about the subscription and are motivated to stay longer. If users unsubscribe, Sinemia gets more revenue in return. If users want to avoid the initiation fees, the only way is to be locked in for a yearly bill.

Even though Sinemia has multiple plans and higher pricing points, Sinemia will try to enlarge its user base and leverage it for a better deal with cinemas. What I think will be appealing to cinemas is that Sinemia can prove that it attracts moviegoers in unpopular times during a day. Movie slots are perishable. Once it goes by, there is no way to recover it. Hence, cinemas would be interested in putting butts on their seats during low-traffic hours. If Sinemia can prove that it is able to deliver that, its position will be stronger. Anyway, its business model is saner than MoviePass’.

 

Apple Event

I have always been a fan of Apple, but the admiration for the company grows every year.

The company often draws criticisms such as lack of innovation, predatory practices and pricey products. While some of their practices such as expensive accessories or making features obsolete after only 2-3 years are good points (I am on my 3rd Mac charger that costs $85 more or less each), I wouldn’t do it any differently if I were in Apple’s management team. The same goes for high prices. If my company had such a degree of inelasticity (demand isn’t much affected despite higher prices), I’d do the same. Plus, Samsung increased the price of its flagship phone to $1,000 too but it hasn’t sold as well as its Apple counterpart. Granted, Apple is rarely the first to introduce stuff. They prioritize in doing it right and I like that approach. What’s the point of introducing new stuff if it doesn’t work well? Ask Samsung 7.

Instead, innovation from Apple is the ability to deliver more performance and add more features to a small device year after year. Imagine the yearly tasks of coming up with the design of the hardware, getting it right so that customers are so happy, deciding on what features to add, manufacturing the chips, rewriting the software, integrating the hardware and software, planning the distribution, strategizing the line-up to avoid cannibalization…It sounds exceedingly complex and difficult to me. The result? They are the first American company to reach a trillion dollar market cap. Their average selling price for phones increased after the introduction of iPhone X. Revenue and profit keep rising. And customers are happy. I have a mid-2012 Mac and an iPhone 5S. They are still working well and I don’t imagine I’ll come back to Windows or Android any time soon.

This morning, Apple did it again with a plethora of updates to their Watch and iPhone. A lot of new features and performance are added to small devices. Some enhanced products come at more or less the same price as last year’s new-then arrivals. I was impressed by the Apple Watch. It is now FDA-approved and can detect irregular heartbeats, ECG as well as falls. At this rate, I’d not be surprised in a 3-4 year time that their Watches will be instrumental to people’s health tracking and safety.

I think Apple is a brilliant example of focus, product-centric design, strategy and execution.

Must-read book on business & strategy

I just finished the book “Subscribed: Why the Subscription Model Will Be Your Company’s Future – and What to Do About It”. It is a fascinating book that explains clearly and well the importance of a customer-obsessed subscription business model nowadays.

I have been to Strategy classes at universities. The classes usually involve academic lectures and outdated case studies. Although hindsights are always great and strategies can only make sense after a while, the technological advances (cloud computing, machine learning…) have changed significantly how companies interact with customers and how customers want to be served. It is of little value to analyze what companies did 15 or 20 years ago (I used to be asked to analyze Google while it was still competing with Yahoo in 2003). The principles and theories of strategy remain the same, but the landscape under the influence of technology has changed dramatically. For instance, nobody is installing software by buying a disk any more. Software is delivered over the Internet now mostly in the subscription-based model. Lectures taught by professors at Ivy League and certificates can be accessed online at MOOC. With a small fee, guys can receive shaving blades every month. The days of having to buy hardware for IT services are over. IT is now delivered over the cloud and on the pay-as-you-go basis.

This book details the underlying factors contributing to the meteoric rise of subscriptions and what it is like to be customer-obsessed. It also discusses the ramifications of adopting subscription-based model ranging from HR, Marketing, Sales and organizational structure. It is choke full of successful subscription companies. If you are interested, you can do a separate study on each one.

I believe this book should be a must-read for college students, whether you major in business or not. If you have sometime to waste, I highly recommend it.