Sinking Snap

Posted: October 31st, 2018 | Author: | Filed under: snapchat | No Comments »

 

A 6,000-word memo, Q3 earnings, the first desktop app, and an all-time low stock price. Snap has had a busy October!

The strong product/design-minded founder in Evan. The young user base. The LA location. The numerous hit products that have influenced many others. There is so much to love. But like any investment, there are many reasons to be concerned.

Identity Crisis

As a product manager, I appreciate focus. I prefer working for a leader that is capable of understanding what the company is, and what it isn’t. A mission that is inspiring and provides direction. This is one quality that has drawn me to Snap. Unlike Amazon, that does a little bit of everything, or Microsoft, that has its fingers in many cookie jars, Snap is focused. Snap has one app with a limited amount of functionality.

Since the IPO roadshow and the renaming of the company from “Snapchat” to “Snap”, Evan has insisted that Snap is a camera company. Evan’s 6,000-word memo continues this narrative. The first line of the memo is “We are a camera company.”

This line is followed up by –

“We contribute to human progress by empowering people to express themselves, live in the moment, learn about the world, and have fun together.”

This is an identity crisis. Evan’s stubborn attempt to label Snap a “camera company” is a leap. This may be his attempt to shake the “social media” label, which I commend, but it’s clear to me that Snap is a communications company. One that does an especially good job of allowing people to communicate through pictures and videos.

Later on, Evan says

“We’ve been working hard since the redesign to solve the problems that we created and continue making Snapchat the fastest way to communicate.

And sets the 2019 OKRs as follows

2019 OKRs

  • Make Snapchat the Fastest Way to Communicate
  • Find Best Friends for all Snapchatters
  • Achieve Full Year Profitability
  • Lead the Way in Augmented Reality
  • Spread Positivity

Camera or fast communication. What is Snap? Can it be both? What should Snap be?

Fastest Communication

Striving to be the fastest way people communicate is a noble goal that addresses a basic need for everyone on earth. From Western Union to AT&T to Tencent, many companies have been built by focusing on improving the speed of communication.

If Evan wants to make Snapchat the fastest way to communicate, what are the best ways? A picture tells a thousand words. In this way, Evan’s stance that Snap is a camera company makes sense. But peer-to-peer digital communication is largely a text game that Snapchat isn’t concentrating on.

Text-first apps like WhatsApp, Facebook Messenger, Hangouts and Tencent own the fast communication space.

These products are much different than Snapchat. They’re multi-device (PC and mobile). They’re multi-platform (iOS, Android, web). They have “light” versions to reach those with low bandwidth access.

There are some things that are slow to change. No matter how much mobile keyboards improve, users are still quicker at typing on a laptop/desktop keyboard. To be the go-to communications app, it’s important to have everyone’s friends on the app. Without a low bandwidth version, you will not accomplish that goal.

Beyond distribution, these Snpachat is a different experience than the leading messaging apps. Snapchat opens up to the camera, the others open up to a text box. Snapchat is ephemeral with no option to save your history. For Snapchat to become the fastest way for me to communicate, they’d have to move away from their camera-centric approach and greatly invest in their text-based communication.

One-on-One, One-to-Many, One-to-Newsfeed

ICQ, AOL Instant Messenger, WhatsApp, Messenger. These apps had/have a lot of users, with high engagement. But they also never made money.

One-to-Newsfeed products like Facebook, Twitter, and Instagram have shown to be highly profitable. Not many digital ads convert better than a native ad in a newsfeed.

One-to-one or one-to-many chat experiences, on the other hand, have rarely found a sustainable business model. Tencent *may* be the exception but WhatsApp and Messenger’s inability to monetize in the US shows there is still work to be done in this space.

Although I like Snapchat’s focus on fast communication I worry about its ability to monetize. Snapchat Stories, which is a One-to-Newsfeed type of model, is very monetizable (but now a crowded space). Facebook has started monetization with WhatsApp and Messenger by allowing businesses to communicate to customers. Facebook is in the process of rolling out paid tools for businesses but has not yet meaningfully monetized the largest communication apps in the United States.

Bottom Line

Evan needs to decide if he wants Snap to concentrate on cameras or communication. Despite monetization concerns, the “fastest communication” play is Snap’s best bet. Snap should invest in bringing Snapchat to different platforms (web, Apple TV, Amazon Fire), improve their text-based chat and create a low bandwidth friendly version. These steps will allow Snap to empower the world to communicate as quickly as possible.


Facebook Founders Fly The Coop

Posted: September 30th, 2018 | Author: | Filed under: facebook | No Comments »

Instagram, WhatsApp, and Oculus. These are the three prize acquisitions of Facebook and, as of last week, these three units no longer have their founders. For years Facebook has been praised for acquiring companies and, for the most part, allowing these companies to stay independent. As time went on, that independence eroded and the founders eventually left. Critics of Facebook are jumping all over this alleged change. Did Zuckerberg mismanage this situation? Will founders be less likely to sell their companies to Facebook going forward? Is Facebook a terrible place to work?

Gruber and Acton’s Take

Let’s start with Gruber’s take (of DaringFireball)

Parmy Olson, writing for Forbes:

For his part, Acton had proposed monetizing WhatsApp through a metered-user model, charging, say, a tenth of a penny after a certain large number of free messages were used up. “You build it once, it runs everywhere in every country,” Acton says. “You don’t need a sophisticated sales force. It’s a very simple business.”

Acton’s plan was shot down by Sandberg. “Her words were ‘It won’t scale.’”

“I called her out one time,” says Acton, who sensed there might be greed at play. “I was like, ‘No, you don’t mean that it won’t scale. You mean it won’t make as much money as… ,’ and she kind of hemmed and hawed a little. And we moved on.” […]

When Acton reached Zuckerberg’s office, a Facebook lawyer was present. Acton made clear that the disagreement — Facebook wanted to make money through ads, and he wanted to make it from high-volume users — meant he could get his full allocation of stock. Facebook’s legal team disagreed, saying that WhatsApp had only been exploring monetization initiatives, not “implementing” them. Zuckerberg, for his part, had a simple message: “He was like, This is probably the last time you’ll ever talk to me.”

Gruber’s response to this quote  – “Sounds like a delightful place to work.”

The WhatsApp founders are presenting themselves as benevolent product people who want to empower people to communicate. By contrast, Acton is presenting Facebook as greedy, immoral capitalists that want to make a buck at all costs. As usual, the truth is somewhere in the middle.

Facebook acquired WhatsApp four years ago, on February 2014 for $19 billion, yes billion with a “B”. Over the last four years, Zuckerberg and the rest of Facebook have let WhatsApp run independently. So far WhatsApp has made Facebook a whopping $0. It appears clear to me that Zuckerberg’s patience was up and he was pushing Acton and the rest of WhatsApp to start monetizing. For the leader of a public company, this is the right thing to do. Four years of no monetization and focusing on the user/product is very fair, now go make some damn money.

Was Acton against monetization? No, but he appears to be against Facebook’s preferred approach of monetization – Ads. His quote in the interview is great for eyeballs but did he actually believe Facebook would want to use a metered-user model? How long would it take for this metered-user model to make back the $19billion Facebook spent?

Facebook doesn’t make money this way. Facebook wants their products available to everyone, and for free, supported by ad revenue. Note to all founders – if you sell your product to Facebook (or Google) it will be supported by ads someday.

The second part of Acton’s quote, “You don’t need a sophisticated sales force. It’s a very simple business.”, also shows a naive understanding of Facebook’s business. Facebook’s long-term approach is a self-serve ad model. Facebook is implementing a “very simple business” monetization approach to WhatsApp, and one that they know very well.

Ads are Bad

What exactly is Acton’s beef with serving ads in WhatsApp Stories? Is this really as “evil” and “creepy” as Acton and many journalists believe? Are serving the most relevant ads to users to support a tool many people benefit from every day more “evil” than charging the same people? This is the narrative I have trouble understanding despite the amount of ink spilled about it.

The main fear is that Facebook’s drive for targetted ads forces it to act as a surveillance organization, not that dissimilar than the NSA. Some believe this information can be used against you. Does Facebook have enough personal/private information to cause harm to you? That’s in the eye of the beholder.

If the root of the fear against ads is not in the ads themselves but with the surveillance that comes with targeting ads, is there a way to improve this fear? How much less money would Facebook make with no targeting at all? 10x less? Could Facebook modify targeted ads to be opt-in, including what information is available for targeting? It’ll be interesting to see how Facebook addresses this issue in the long-term.

Sounds like a delightful place to work.

Gruber’s accusation that Facebook is a terrible place to work is laughable. Yes, Zuckerberg appears to have a ruthless side to him. I’d imagine all CEOs running a company of that size has this side to them. That being said, by all accounts, Facebook appears to be an excellent place to work.

Facebook is #1 in Glassdoor’s “Best Places to work” category and Zuckerberg consistently ranks high in the “Best CEOs at large companies”. He currently ranks 18.

But, but, the Instagram and WhatsApp founders quit! This must surely mean there is a problem!

Not quite. Founders leaving a company after being acquired is inevitable. The fact that the Instagram founders stayed for six years and the WhatsApp founders stayed for four is astounding. Most founders have zero desire to work for a large company, which is why they’re founders. Most companies work quickly to monetize and make their mark on their new baby, but Zuckerberg allowed these companies to run independent much longer than most, which kept their founders around longer than expected.

What this means for the future of Facebook Acquisitions

If there ever was a myth that you could sell your company to Facebook, get rich and never have to monetize, that myth is now exposed. But, I don’t believe this was ever the case. Every founder knows every deal has strings attached.

As Ben Thompson put it

Controlling one’s own destiny, though, takes more than product or popularity. It takes money, which is to say it takes building a company, working business model and all. That is why I mark April 9, 2012, as the day yesterday became inevitable. Letting Facebook build the business may have made Systrom and Krieger rich and freed them to focus on product, but it made Zuckerberg the true CEO, and always, inevitably, CEOs call the shots.

Perhaps Systrom, Krieger and Acton were all too naive to understand this but it’s unlikely. Their treatment and resentment of Facebook may cause founders in the future to take a closer eye at a Facebook offer but unlikely to deter them. Facebook’s pockets are deeper than ever, and these deeper pockets can make up for any goodwill lost here. The impact on these departures is hard to predict and even harder to measure but keep your eye out for more high-profile Facebook acquisitions, they’re not done yet.

 


Trillion Dollar Apple

Posted: August 30th, 2018 | Author: | Filed under: apple | No Comments »

Not So Peak Apple

When Steve Jobs returned to Apple in 1997, Michael Dell, CEO of Dell, was asked what he’d do if he were in Jobs’ shoes, Dell said:

“What would I do? I’d shut it down and give the money back to the shareholders.”

In 2006, when the Apple smartphone rumors started building steam, Ed Colligan, CEO of Palm had this to say

“We’ve learned and struggled for a few years here figuring out how to make a decent phone,” he said. “PC guys are not going to just figure this out. They’re not going to just walk in.”

In 2007, when Apple was on the verge of releasing the iPhone, Steve Ballmer, CEO of Microsoft had this to say

“Now we’ll get a chance to go through this again in phones and music players. There’s no chance that the iPhone is going to get any significant market share. No chance. It’s a $500 subsidized item. They may make a lot of money. But if you actually take a look at the 1.3 billion phones that get sold, I’d prefer to have our software in 60% or 70% or 80% of them, than I would to have 2% or 3%, which is what Apple might get.”

Beyond those infamous quotes, there has been an onslaught of “Peak Apple” predictions and articles from every corner. Below you can see the Peak Apple articles themselves hit a peak in October 2011, when Steve Jobs passed away.

Google Trends graph for “peak apple”

 

Fast forward to 2018 and a lot happened. Dell shrunk and had to go private. Palm was acquired and is out of the smartphone game. Microsoft is out of the smartphone game and Ballmer retired. But one thing has remained the same, Apple continues to grow.

How it Got to a Trillion

Apple’s march to a trillion starts off with Steve Jobs’ integrated approach to creating products. Unlike Dell, who focused on the hardware, or Microsoft who focused on the software, Apple focused on both. During the 80s, 90s and early 2000s, this integrated approach to building PCs was great but not as great as a business as Dell’s and Microsoft’s specialziation strategy. Dell and Microsoft made more revenue during this era but Apple was building an expertise – building hardware and software that worked in harmony.

In 1997, Steve Jobs returned to a down-and-out Apple as CEO. Apple had lost its way and Jobs immediately cut down the product lines to establish focus. This focus enabled Apple to be ready for the next big opportunity, the iPod in 2001. The iPod was the first modern device Apple made that leveraged its competitive advantage of building integrated products to take advantage of a macro trend, in this case the rise of MP3s.

The focus, the integrated product approach and specifically the iPod set Apple up to take advantage of perhaps the biggest product opportunity ever – the smartphone. As wireless broadband, ARM processors, lithium batteries and touchscreen technology reached a point of maturity, Apple was ready to pounce and exploit its expertise to fill an enormous demand for smartphones. And pounce they did, creating the iPhone that has been the main revenue driver that allowed Apple to become the first publicly traded $1 trillion company in the US.

What’s Next For Apple?

Is this it for Apple? Is this the peak? I sure as hell won’t make the mistake of attempting that prediction.

The iPhone will continue to be a money maker for Apple for some time. Despite experiencing a plateau with total iPhones shipped, the iPhone continues to grow in revenue by moving more high-end and adding more tiers. Furthermore, Apple has opportunities to ship more units as India and China’s middle class grows, time will tell if we’ve reached peak iPhone shipments. The services revenue and peripherals (Watch, AirPods) will continue to grow revenue for Apple.

But keeping the status quo is not the company Steve Jobs wanted to build and it’s not the company he left behind. Like Walt Disney before him, Jobs established a company of values and conviction that can survive and thrive well after his death. Perhaps the best part about speculating Apple’s future is how tight-lipped they are with future plans. Will Apple ride the VR wave? Will Apple be a player with autonomous cars? We don’t know the answers to that yet but you can bet Apple won’t rest on its laurels. Apple will, for the most part, avoid increasing revenue through acquisitions and will instead invest heavily in creating products that allow Apple’s integrated approach to shine.

 

 

 


Growing Facebook, Inc.

Posted: July 31st, 2018 | Author: | Filed under: facebook | No Comments »

FB Growth

It’s been a wild ride for Facebook’s stock in 2018. It was punished by “Cambridge Analytica” in April but had a big ramp up from May-July resulting in an all-time high market cap of ~$630 billion dollars.

But that changed when Facebook released its earnings last week. The stock dropped over 20% and the current market cap is closer to $500 billion. Wall Street is spooked about Facebook’s guidance for slowing growth.

Our total revenue growth rates will continue to decelerate in the second half of 2018, and we expect our revenue growth rates to decline by high-single digit percentages from prior quarters sequentially in both Q3 and Q4.

– Facebook CFO Dave Wehner

Is the market acting rationally? Was the earnings report “abysmal” like many hot takes have labeled it?

Financial Fundamentals

In Q1, FB’s revenue grew 49% yoy. In Q2, FB’s revenue grew 42% yoy. This new guidance puts FB’s Q3 growth greater than 32% and Q4 growth greater than 22%. Although this guidance is lower this is incredible growth for a company of Facebook’s size. Apple, Google, and the all mighty Amazon have all averaged growth under 30% yoy the last decade. Even with Facebook’s revised guidance, it is ahead of the pace of its peers. With its P/E at 23, this gives FB a PE/Growth (PEG) of well over 1. According to value investor Peter Lynch, Facebook is cheap from a fundamental perspective.

It seems difficult to label this earnings call as abysmal. The fundamentals are strong with few attacks on its current business model. But does this make Facebook a value stock instead of a growth stock?

#DeleteFacebook

The height of #DeleteFacebook was in April and any ramifications were reported in the earnings last week. US & Canada were flat with both DAUs and MAUs, which means few followed through with deleting their account. European users saw a decrease in DAUs which Facebook is attributing to GDPR rollout, not towards #deleteFacebook.

The good news from the earnings report is that there is no mass user exodus. All “Peak Facebook” predictions have fallen flat. That being said, user growth of Facebook.com may move closer to internet growth in general. But should Facebook’s growth potential be evaluated based on Facebook.com’s user growth? Or should Wall Street start paying attention to the new number rolled out these earnings –

For the first time today, we’re also releasing how many people use at least one of our apps, Facebook, WhatsApp, Instagram or Messenger, and that’s 2.5 billion people each month.

-Mark Zuckerberg

WhatsApp, Instagram, and Messenger can all continue to grow for years to come. Since Facebook provides a way for advertisers to target users on any of their apps, it doesn’t quite matter which of these apps the eyeballs are on. Therefore, revenue growth is no longer as tied to Facebook.com’s user growth as it has been in the past.

Areas of Growth Opportunity

Stories

The biggest place Facebook has work to do is in monetizing Stories. After paying $22 billion dollars for WhatsApp in 2014, Facebook finally has an opportunity to make some of that dough back. WhatsApp has 450mm DAUs on WhatsApp Status (their stories format). Add another 400mm for Instagram stories and 150mm on Facebook stories and you have a lot of eyeballs to monetize.

Like the mobile monetization before it, I expect Facebook to easily capture value with Stories. In Facebook’s early days as a public company, many doubted its ability to advertise effectively on mobile. Today, it accounts for 91% of Facebook’s advertising revenue

Mobile ad revenue was $11.9 billion, a 50% increase year-over-year, making up approximately 91% of total ad revenue.

Similar doubts exist about Facebook’s ability to monetize Stories. These doubts will go unfounded as time goes on. The uncertainty around monetizing mobile ads were more founded than Stories since no other mobile app was monetizing ads at scale when Facebook started that journey. But with Stories, Facebook (and Wall Street) has Snap to use as a model. Snap is pulling in ~$1.20 per quarter per user from Stories monetization (and growing 35% yoy). With over 1 billion DAU Stories users, Facebook can easily make another $1 billion per quarter from these ads (and I expect much more as time goes on).

Marketplace, Workplace, and Occulus 

Like Google before it, Facebook continues to attempt to diversify its revenue streams but so far all attempts are dwarfed by the mega success of their advertising products.

“Payments and other fees” brought in $193mm, which is 1.5% of total revenue. This means that Marketplace, Workplace, and Occulus are not producing significant revenue. Although this is an area of opportunity this is also an area to keep expenses down. Facebook remains more focused than Google and Amazon, but can Facebook make the tough decisions? Can/will Facebook shut down a major effort if it underperforms?

Based on its low PEG, you can make an argument that Facebook is a value stock. But its growth days aren’t over as last quarter has shown. When you consider the revenue growth and user growth potential of products under the Facebook umbrella, it becomes clear that Facebook is a growth stock with fundamentals that appeal to a value stock investor.

FB will reach a new all-time high before 2018 is over. The $1 trillion market cap is still less than five years away. Facebook’s growth isn’t over yet.

Disclaimer – I own $FB and am biased AF

 

 

 

 


Facebook is F*cked, Long Live Facebook

Posted: June 28th, 2018 | Author: | Filed under: facebook | No Comments »

In March, in the thick of the Cambridge Analytica and #DeleteFacebook “movement”, I wrote a piece defending Facebook.

It’s now June and time to reflect. Zuckerberg has been dragged in front of Congress and the European Parliament. The Cambridge Analytica headlines have slowed. #DeleteFacebook is no longer trending. Facebook released earnings results which showed user growth, not users leaving Facebook. Furthermore, Facebook’s stock has reached an all-time high, over $200 a share and a near $600B market cap.

Facebook Nevers

MG Siegler remains a top 5 tech writer in my book but I disagree with his Facebook analysis. After seeing #DeleteFacebook was a complete joke, MG has turned his rationale for Facebook’s inevitable decline…”Facebook Nevers“.

 The fall of Facebook was never going to be people quitting the service en masse — it’s too interwoven into the fabric of the way many of us use the web these days — it was always going to be the people who never really use the service in the first place. Kids.

MG compared Facebook to Cable. It’s not that people will quit en masse but youngsters won’t sign up. He acknowledged that probably wasn’t the case –

But again, Facebook is so integrated into so many lives that in many cases you’re basically forced to sign up. Even the kids in many cases. Just as they must sign up for an email account. It’s a rite of passage, in a way. Your entrée onto the internet. So perhaps “never” is a bit harsh of a word here.

Anecdotally, what MG says in the last quote is what I’ve experienced. All of my younger cousins are on Facebook but don’t post to it much (it’s unclear how often they lurk). MG’s analogy to email is spot on here but he missed the larger arch. Young people will sign up for both email and Facebook early but won’t use either…until they become adults. They’ll use email when they go to college and much more when they enter the workplace.

Facebook is awful when you’re finding yourself as a kid. But it’s awesome when you’re stuck at home raising two young children. Sharing your children grow with people around the world is amazing for parents. Facebook will have less use in the 13-25 demo but once people enter parenthood, their behavior will change in many ways, including how they use social media.

$100B Instagram

According to “Bloomberg Intelligence”, whatever the hell that is, Instagram is now worth $100B. That number may as well be right but something is worth how much someone is willing to pay for it, not based on what data or some analyst says. That being said, Instagram is killing it.

In March, I said –

Few will #DeleteFacebook and those who do will come back or increase their Instagram use.

This appears to have come to fruition. Instagram now has over 1 billion users with 400 million users using Instagram Stories daily. That’s a shitload of engagement. For some reason Facebook is not releasing time spent on Instagram so attempts to compare it to Snap is apples to oranges.

Who knows if Instagram is worth $100B but it’s safe to say it’s not being factored into Facebook’s valuation reasonably. With Facebook’s PE hovering around 25, the market isn’t expecting much growth from a product now responsible for over 15% of FB’s revenue (and growing rapidly).

Facebook to A Trillion in Five Years

Now that the media cycle has passed and the Facebook bears have went into hibernation, we can talk about where Facebook is going. Five years ago Facebook’s market cap was ~ $60B. Many thought that was absurd but here we are, five years later and $FB is worth 10x more.

Facebook is ~$400B (1.7x growth) away from the elusive $1 trillion market cap. With revenue growth at 47% in 2017 and PE at a reasonable 28, it’s hard to see this locomotive slowing down anytime soon. To get to $1 trillion dollars, FB needs to average a paltry (for Facebook) 12% market cap growth a year.

Facebook growth with 12% yoy market cap growth per year

How does it get there? Can Facebook continue to grow its user base past 2 billion? Although there are another 6 billion people to go in the world, Facebook can reach $1 trillion through ARPU Growth.

ARPU Growth

Over the past seven years Facebook has averaged 26% growth in revenue per user. Continuing this trend alone will push Facebook past the $1 trillion mark with ease. User growth, monetization of WhatsApp, Oculus revenue etc is icing on the cake.

Facebook’s demise was media hype. Instagram will continue to grow its user base and monetization. Facebook proper will continue to be Facebook, serving 2 billion people a day content and ads. ARPU will continue to increase. In 5 years, $FB will be worth $345/share at a $1 trillion market cap.

There are dozens of reasons why these predictions may not happen, but I’m putting my money on Zuckerberg and Facebook. Easy money!

Disclaimer – I own $FB and am biased AF


Smart Speaker Wars

Posted: May 31st, 2018 | Author: | Filed under: amazon, apple | No Comments »

Kind HomePod

Like the Apple Watch and AirpPods before it, many think the HomePod is a flop. There are common criticisms and rationale behind this sentiment. In the end, the HomePod will play out like the Watch and AirPods. It’ll be the most loved and most profitable product in its market.

The “Smart Speaker” category is just getting started. Amazon, with their Echo family of speakers owns 70% of the market. Google owns 25%. But, only 20% of US Adults own a smart speaker. From the iPhone to the Watch this is one of the least mature industries Apple has entered in awhile.

Apple’s foray into Smart Speakers is the same playbook they’ve followed for decades. Apple is never the first mover, they’re always “overpriced” and “under featured”. The HomePod is all of these to the T yet those who follow Apple closely believe this time is different. That Amazon has an insurmountable lead.

The HomePod’s strengths compared to the competition is voice recognition and sound quality. Siri may not be as accurate and robust as Alexa but the HomePod is most likely to hear your command. The price point is much higher than Amazon’s and Google’s products but the sound quality is arguably the best. Smart Speakers largest use case so far is to play music. Apple is making sure they nail this.

Ben Thompson believes HomePod’s sole native integration with Apple Music is an example of Apple’s strategy of squeezing more out of current customers. He cites Apple’s iPod’s interoperability with Windows as a clear difference in Apple’s strategy with HomePod. Ben forgets the first generation iPod was only MacOS compatible. Time well tell if Apple provides better support for Spotify and Amazon Music.

Apple continues to follow Apple’s strategy since its inception –  ensure Apple products work best within the Apple ecosystem first and foremost. Airplay from an iPhone, using Siri to play Apple Music – make sure these experiences work 99.9% of the time before rushing to support other systems.

Amazon’s strategy is much different. Amazon is focused on creating cheap devices. They’re on the lower end of sound quality and the price point implies the margins are slim or non-existent. Amazon doesn’t announce their strategy but there are two strategies that make sense when selling something at a loss. The first is to ensure market share and slowly but surely raise the price until you’re profitable. The second is to make money off of the device in other ways. Microsoft famously lost money on every Xbox but made it up on licensing from games sold. Google doesn’t make money off of Android but off of Google Searches on Android phones. Amazon believes those with an Alexa device in their home will buy more stuff from Amazon. Will this be true? So far there is evidence of correlation but not causation.

Beyond price, Amazon’s Alexa is a better voice assistant than Apple’s Siri.  But…both leave a lot to be desired. Despite the majority of people having access to voice assistants on their phone, only 46% have used them once. Of those who do use it, only 39% found that voice assistants accurately respond to their commands most of the time. Imagine if Google Search was only 39% accurate? Voice assistants aren’t quite ready for prime time.

Apple is behind on market share. HomePod is expensive. But HomePod is the best at what people use Smart Speakers for – playing music. The price point will drop, the HomePod will support more third party devices/streaming apps and Siri will catch up to Alexa and Google Assistant. Ultimately the HomePod will never have the most market share but they will own the most profit in the category.


The Positive Beat

Posted: April 30th, 2018 | Author: | Filed under: apple, facebook, Investing, snapchat, writing | No Comments »

Beat reporting, also known as specialized reporting, is a genre of journalism that can be described as the craft of in-depth reporting on a particular issue, sector, organization or institution over time.

This month I’m taking a break from writing about tech to get meta. I want to write about writing.

My favorite content online is by those who have a beat. Writers with specialized knowledge on a subject. Writers with an expertise, not those summarizing a press release.

Throughout the years I’ve grown fond of M.G Siegler’s and John Gruber’s take on Apple. And Josh Constine’s take on Facebook.

There are two other commonalities about these writers that separate them from the pack. They have a distinct voice. I enjoy the way their writing sounds when I read it in my head. But perhaps more importantly, they all took a positive beat. M.G. and Gruber are known as being Apple Fanboys. Josh was able to see Facebook’s potential when many doubted them.

But, surprisingly, I find taking a positive beat rare. Even more of a bummer, M.G., Gruber and Josh are all spilling more ink on critical, negative beats. M.G. loves Amazon but hates Facebook and has grown more critical of Apple. Gruber is generally pro-Apple but detests Trump, Facebook, Guns and Google. Josh prefers to criticize Snap, and like the rest of the blogosphere, crucified Facebook over Cambridge Analytica.

After a newsletter where M.G. was bearish on the HomePod and MoviePass I wrote to him:

A lot of negativity in this one! HomePod is a flop, MoviePass won’t work out, etc.

Not that you always have to be a cheerleader but I think writing on things you are bullish about have always been your sweet spots. Back in the day you nailed the positives about Apple when the majority of your peers were pressed to write hit pieces.

I know you know this, but I think time will tell your take on the HomePod is wrong. Apple is playing the same strategy they’ve always played with devices. Go high-end, have good margins to start, don’t worry about market share. Marketshare comes with a superior product. I hope you write this down as claim chowder for yourself, if Apple shows a Watch-esque position with the voice-commanded speaker market, they pulled it off.

He replied:

I try not to think of things as negative vs. positive, I care far more about being proven right in the end! And yes, we’ll see how HomePod does — especially after the first price cut and launch of SiriKit at WWDC!

+1. Being right is more important than being positive. I’d never want to take an incorrect positive stance.

Haters Gonna Hate

Hating clouds your judgement. People are at their worse (and illogical) when they’re offended and outraged.

M.G. made his mark by making the Apple bears look like fools. While most were writing about “Peak Apple”, M.G. saved their claims as claim chowder. When their foolish predictions were proven incorrect, he call em out. Yet, here is M.G., three years ago, incorrectly claiming (by nearly 500mm users) that we reached Peak Facebook.

Gruber, Siegler and Constine all took bearish stances on Facebook the last couple of months. I decided to go against the grain and defend them. As Facebook’s latest earnings report shows, the media once again overreacted.

And there you have it, my negative take on negative takes. M.G. is right, stick to being correct first and foremost, but there is too much positive going on in this world to focus on the negative. Negative bias appears stronger than Positive bias. Those who hate tend to get it wrong.

As I write going forward, I want to concentrate on the following. Write about what I know. If I don’t have anything good to say, I won’t say it all. I’ll find something else to cover. Put your money where your mouth is. If I write positively about a company, I should own their stock. And finally, write using a voice. This last part, the most important, is also the toughest.


In Defense of Facebook

Posted: March 24th, 2018 | Author: | Filed under: facebook | 2 Comments »

The Criticism

Facebook’s in the hot seat. Facebook is catching heat for the way a third party used Facebook data. Cambridge Analytica used data from a Facebook connected app in 2015. This app allowed a developer to harvest data from the friends of those who signed up. This gave them information about 50 million people. Names, occupations, check-ins, posts and more. The public sentiment is that it’s wrong for a company to allow anyone to hand over your data to a third party. Your friend should not be able to do so. Note: Facebook stopped allowing third parties to grab friend’s data in 2015.
 
It’s believed Cambridge Analytica used this data to help the Trump Campaign. Cambridge Analytica used the profile data with other data to create psychological profiles. They believed these profiles allowed them to better target political ads.

Facebook Is Not Alone

 
Context is key. Although it doesn’t justify being loose with data, Facebook is not alone. Apple via iOS’s “Allow Access to Contacts”. Google via Android access to Contacts and Google+. LinkedIn. All have allowed developers access to their friends’/connections’ information.
 
There are companies who have created large databases of our information up for a price. FullContact is a leader in this space. Use their API here to find out what they know about you.

Theories on Public Reaction

Despite the lack of evidence that this targeting was effective, the public is furious. Despite other companies allowing people to share their friends information, Facebook appears to be singled out. I’m trying to put my finger on why now and have some working theories.

Google vs Facebook

Google Search helps you find things. It’s a utility. Facebook is a community of people. Communities like Facebook elicit emotions and sometimes these emotions are negative. When you read hate spewed by a distant friend, you associate that emotion with Facebook. Facebook can be a magnifying glass on your community, and it allows you to see the warts.
 
Facebook is also a mirror. Facebook can be addictive. It makes it easy to see you may care about what others think about you more than you care to admit. Instead of focusing the energy on improving, many choose to blame Facebook.

The Trump Connection

The Trump association to the public outcry is hard to deny. Obama’s campaign’s use of friend’s data has not caused an uproar. Obama’s campaign did not violate Facebook’s Terms of Service. But the app did use data that the “friend” didn’t approve of. Like many things connected to Trump, his association exasperates the public reaction.

Myth vs Reality

Myth – Facebook sells your and your friends’ data
Reality – Facebook does not sell data. Facebook sells access to advertise. Facebook no longer allows third-parties to have access to your friends’ data
Myth – You are the product
Reality – Facebook must serve their users. Without the 2 billion users, there is no one to advertise to. Zuckerberg has proven he is in it for the long haul. Zuckerberg will continue the balancing act of pleasing the 2 billion users. Not to mention the media, governments, businesses and advertisers.

Google, of course, poses similar threats to the journalism ecosystem through its own digital advertising industry. But Googlers can also make a strong case that Google makes valuable contributions to the information climate. I learn useful, real information via Google every day. And while web search is far from a perfect technology, Google really does usually surface accurate, reliable information on the topics you search for. Facebook’s imperative to maximize engagement, by contrast, lands it in an endless cycle of sensationalism and nonsense.

– Matthew Yglesias, Vox

Myth – Facebook has no value to the spread of information. Facebook focuses on maximizing engagement.
Fact – Facebook provides a platform for discourse. Those posting “Fake News” may learn from the hive.
 
Facebook may have focused on maximizing engagement in the past but no longer. Zuckerberg has said the new goal is “to make sure time spent on Facebook is time well spent.” Zuckerberg understands users will leave if he maximizes engagement in the short-term

Facebook Regulation

Facebook is a public company in the United States and used all over the world. Facebook is under SEC, FTC, EU and many more regulations. Will new regulations form that will affect Facebook? Yes. This has always been the case. The fear the market is having now about regulation seems irrational. Facebook makes money by allowing targeted advertising. Facebook does not make money by selling (or giving away) data.
 
Regulation as a response from this news may make Facebook stronger. As we’ve seen with Cable regulation, regulation can create a cycle that makes it more difficult for startups to challenge an incumbent.
What type of regulation makes sense to protect user data? Governments will most likely demand tighter control of user data. This may mean no exporting of data. Less data portability makes it harder for an incumbent to bootstrap their service using Facebook data.
Incumbents will have to spend money and time to meet any new regulations around user data. Facebook has the money and resources to do this easily.

Facebook Valuation

Facebook’s PE (price to earnings) is 25. In comparison, Google’s is 31, Microsoft’s is 26 and Amazon’s is 352.  Compare that to their growth rate the past ten years. Facebook’s revenue growth rate per year has been 80%, Google’s 24%, Microsoft’s 7% and Amazon’s 29%. Facebook is growing quicker than its peers yet the market is valuing its potential lower. The S&P 500 has a PE of 25.  Is Facebook’s growth going to be the same as the S&P 500 like currently valued? There is sentiment to back up this valuation, and sentiment alone. Sentiment and reality aren’t always connected.
 
Facebook’s core business has continued to grow like a weed. Instagram continues to grow and make revenue. WhatsApp and Oculus provide little to no revenue but have great potential. With a PE at 25, it’s as if the market values these assets at 0.

Bottom Line

Facebook discontinued the level of access that caused this leak in 2015. There is no evidence this targeting affected the election. The public outcry is not without merit but an overreaction. Few will #DeleteFacebook and those who do will come back or increase their Instagram use.
 
Facebook will continue to be a lightning rod for criticism. Facebook will continue to improve their PR game. People will continue to use Facebook. Facebook will continue to grow, make more money and be more of an influence on society. Zuckerberg will continue the balancing act.
Note – I own Facebook shares and I’m bullish…if you can’t tell 🙂

 


Snap Back

Posted: February 23rd, 2018 | Author: | Filed under: Investing, snapchat | No Comments »

Snap Rocket

Our work during 2017 is proof that we aren’t afraid to make big changes for the long-term success of our business

– CEO Evan Spiegel

As I’ve been preaching on this blog, buying $SNAP requires patience. Snap (via Evan) continues to plan and execute for the long term. In Q4, Evan shifted the main goal of establishing a self-serve ad model to increasing user growth. Evan planned to do this by a UI Redesign, a new Android app and modifying the feed. When Evan announced these changes I expected results to take time. Three months later, and Snap has its user growth mojo back.

User Growth

Wall Street loves user growth. Although Snapchat has continued to grow every quarter the rate of the growth slowed. This freaked Wall Street out, who assumed that trend would last forever. Snap released improvements to the Android App that resulted in less crashes. This led to a 20% user retention increase. This change reversed the trend and Snapchat had 5% user growth compared to 2.9% in Q3.

This is great news and much quicker than I anticipated. What will happen in Q1 2018? Two major things are at play here. On one hand, Snap has rolled out a significant UI redesign. This design will alienate some of the most loyal users in the short term. Like Facebook News Feed redesigns, Twitter expanding to 280 chars, etc before it. Snap runs the risk of slowing user growth in the short term. In the long term, the easier-to-use UI will help onboard new users.

But, Snap has begun to take a page out of Facebook’s playbook. Snap is working with the ecosystem around Snapchat to help user growth.

We have recently launched partnerships with wireless carriers in over a dozen markets to begin reducing cellular bandwidth costs for Snapchatters around the world. We have seen that when data is less expensive, more people are willing to use our data-intensive products. This is important because Snapchat can be more fun to use out in the world rather than at home on WiFi.

Snapchat’s biggest headwinds are smartphone adoption, cellular broadband speeds and cellular data plan pricing. There are many strategies Snap can use to ease these headwinds. Similar to Facebook’s “Free Internet” play in emerging markets, Snap’s first attempt is to subsidize data plans with the goal of acquiring users. In the future, Snap could help subsidize smartphone contracts or make a “Lite” version of Snapchat.

This strategy will appease Wall Street’s user growth desires but will take a long time to increase revenue. The question is, is this the best place to invest time and resources or is improving the app and self-serve monetization? Can Snap do all three like Facebook has been able to do?

Bottom Line

In 2017, Evan focused on self-serve ads. Evan successfully (painfully?) transitioned the company to 90% of ads purchased programmatically. In Q3, Evan announced a shift in goals to user growth and was able to immediately show results for that promise. Evan continues to deliver on his promises. This reminds me of when Facebook had exactly $1b in profits the year leading up to the IPO. Hitting that profit goal was Zuckerberg’s way of conveying to Wall Street that he had ultimate control of the company.

Going forward, it is important to keep in mind what Snap is focusing on. If Snap is focusing on User Growth in Q4 2017 and Q1 2018 there could be a slowdown in ARPU growth. One quarter of a dip in the growth rate of a main metric is not a death sentence. Focus on the metric Snap is focused on.


Bubble Bobble

Posted: January 24th, 2018 | Author: | Filed under: cryptocurrency, Investing | No Comments »

Bubble Bobble was a great game! Nearly as much fun as watching the Bitcoin Bubble predictions.

What the heck is a Bubble?

A bubble is an object that has a large volume/surface area with little intrinsic substance. Bubbles can get bigger and bigger…and then they pop.

An economic bubble is trade in an asset at a price or price range that exceeds the asset’s intrinsic value. What the fuck is intrinsic value? Well, that’s where things continue to get murky (and subjective). One uses fundamental analysis or technical analysis to determine intrinsic value. Some “experts” use top-down analysis (what does the industry look like, what are the macroeconomic factors). Others use bottom-up analysis (what are the specifics of the company).

Here’s the thing. There is no consensus on what the intrinsic value of an asset is. Like market analysis, it’s in the eye of the beholder. Some claim Bitcoin’s intrinsic value is zero but why? With no precedent, there is no reasonable way to determine Bitcoin’s intrinsic value.

Bubbles of the Past, Not That Scary

We’ve heard about the big ones – Tulip Mania, Dot-Com Bubble and US Housing Bubble.

Tulip Mania was not the tulip bulbs but Future Contracts on tulip bulbs. Two quotes from the Wikipedia article sum it up for me

“In many ways, the tulip mania was more of a hitherto unknown socio-economic phenomenon than a significant economic crisis”

“Many modern scholars feel that the mania was not as extraordinary as Mackay described and argue that not enough price data are available to prove that a tulip bulb bubble actually occurred”

One of the most famous bubbles may not have been a bubble at all.

The Dot-Com Bubble is a modern bubble many of us lived through. I have a different lesson learned than the masses. It’s not that the market was wrong during the Dot-Com bubble, but it was ahead of its time. The NASDAQ peaked at ~5,100 in February of 2000. It recovered in 2015, fifteen years later and is now ~50% higher than its bubble peak (~7,500). There was a bubble but the market recovered with time.

Bubble recovery

Bubble recovery

The Housing bubble of 2006-2007 took an even shorter time to recover. By 2016, the average US house price was back to the 2006 levels.

Housing Prices

Housing Prices

Argument for a Bitcoin Bubble

  • 1,100% price increase since last year
  • Price increase does not appear to be in step with utilization (hard to say for sure)
  • Adding “Blockchain” to a company’s name or companies launching their own cryptocurrency (see Kodak) are having a (irrational?) run up in their stock price
  • People can buy Bitcoin on credit through exchanges like Coinbase

As far as I can tell, all arguments that Bitcoin is a bubble boil down to the fact that its increased in price “too fast”.

Argument Against a Bitcoin Bubble

  • Bitcoin is special. It’s not a company that can run out of money. It’s not a real-estate market that the government and banks affect. Any comparisons to previous bubbles fall flat due to the uniqueness of Bitcoin
  • Bitcoin is being used as a value-store. The government cannot manipulate Bitcoin through printing more currency (like gold). Gold’s current market cap is $7.8 trillion. Bitcoin’s market cap is under $200 million. That market for a value store is massive.
  • Network effects. The more people who have cryptocurrency the more (intrinsically) valuable it is. The enthusiasm around Bitcoin and its price run up has created momentum. More people have Bitcoin than ever. Products, like wallets, exchanges, payment systems and more have been built around Bitcoin. BTC is the default cryptocurrency used to by other cryptocurrencies. Despite is volatility compared to USD, Bitcoin is considered the “safest” cryptocurrency and many flock to it at times of uncertainty.
  • Macro trends. The world continues to become more connected and more digital. A government controlled fiat currency is not attractive to those in the developing world. A future with separation of Money and State, like the separation of Church and State before it, may be the way to go.

Predicting a Bubble

Like timing the market, predicting a bubble is tough work. Real estate has been around for thousands of years yet most missed the “Big Short” opportunity. The stock market went through the 1929 crash yet the Dot-Com bubble still occurred.

Recently many bears predicted a Venture Capital bubble yet that market continues to be robust. Others have been predicting a US Stock Market bubble for a decade now yet that market continues to grow as well.

Despite having hundreds of years of history with stocks and real estate the “experts” have not been able to predict bubbles. These same experts believe they can predict a bubble in something that has no good precedent to compare it to.

Bottom Line

No one knows if Bitcoin is in a bubble or not and those who say they do are full of shit. Why do people want to claim a Bitcoin Bubble? Are they jealous of those Bitcoin Millionaires? Are they fearful of something they don’t understand? It’s one thing to be bearish on Bitcoin, it’s another to be adamant it’s a bubble.

Bitcoin is Dead. Long live Bitcoin!