Mapping emerging scarcity

What investors take for granted as investment ‘quality’ reflects both long accepted wisdom about where scarcity exists, such as distribution moats, brand, patents, and an unstated assumption that these points of scarcity remain unchanged. Instead, it seems likely that extreme changes in marginal costs wrought by technology are forcing a reconfiguration of existing business models.

This essay is an attempt to tie those ideas together to identify where the next great businesses might emerge. Amidst a changing investment environment which lacks historical analogues the challenge for investors is identifying profit pools prospectively.

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The investment paradox of software

The period 2014 to the present has been one of soul-searching for value investors as many formerly successful fund managers retire following stagnant performance. Commenters increasingly describe a market rally that is remarkably narrow in breadth led by FANG (Facebook, Amazon, Netflix, and Google) and other software-driven technology stocks which trade at valuations which appear unhinged from traditional cash-flow based valuation metrics. There are several possible explanations for value investors' under-performance: more competitive markets, diminished information asymmetries, a venture capital bubble, or changes in business models, especially in terms of technology and intangible assets. Yet, there is also some historical evidence that our current tech-dominated market indexes may simply reflect the out-sized importance of software in emerging business models

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Why Customer Acquisition Cost (CAC) is the new rent

A few weeks ago Inc. Magazine wrote a fascinating article whose argument could be summed up in one phrase: Customer Acquisition Cost (CAC) is the new rent [1]. For those not reading tech reports for the past two-years, customer acquisition costs represent the cost of acquiring a repeat customer whether through Google AdWords (search advertising), social feeds (Facebook advertising), or even a marketplace such as Amazon or eBay (sellers’ commission). The crucial point is this concept can also be applied to the physical realm: CAC is a useful tool to compare online digital businesses to businesses which exist primarily in the physical world. I suspect these economic concepts can be extended beyond merely explaining the broad disruption of physical retail but also provide a framework for predicting what business configurations might flourish in the future.

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Why modularized distribution costs matter

A few weeks ago I discussed why the 18th century post office might be the best analogy to understand the role of emerging B2C internet platforms such as Facebook, Tencent, Netflix, and Amazon. I wrote:

The internet today might be best thought of as a number of category verticals: search (Google / Baidu), social (Facebook / Tencent), e-commerce (Amazon / Alibaba), entertainment (Netflix / Tencent), transport (Uber / Grab / Lyft), payments (paypal / mastercard, visa) etc. For instance, Alibaba-owned Ant Financial is using data from its consumer e-commerce business to underwrite new retail loans to cunsumers. Grab is trying to expand its transportation platform into payments through existing relationship with customers. Tencent is using its WeChat chat platform to expand into online stores and payments. In each case a direct relationship to the end consumer (B2C) is being leveraged to both dominate a category and attempt to expand into new adjacent categories.

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Is the 18th-century Post Office useful to understand the current internet eco-system?

Last month I finished reading China’s Mobile Economy which described China’s emerging internet eco-system mostly among Baidu, Tencent, Alibaba (BAT). What struck me from the book is how internet platform businesses are using their category dominance to expand into adjacent services. The internet today might be best thought of as a number of category verticals: search (Google / Baidu), social (Facebook / Tencent), e-commerce (Amazon / Alibaba), entertainment (Netflix / Tencent), transport (Uber / Grab / Lyft), payments (paypal / mastercard, visa) etc. For instance, Alibaba-owned Ant Financial is using data from its consumer e-commerce business to underwrite new retail loans to cunsumers. Grab is trying to expand its transportation platform into payments through existing relationship with customers. Tencent is using its WeChat chat platform to expand into online stores and payments. In each case a direct relationship to the end consumer (B2C) is being leveraged to both dominate a category and attempt to expand into new adjacent categories.

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