Mike's Tech

Where will Howard Stern go next?

Posted on May 21, 2020May 21, 2020 by mikejsiegel

With Joe Rogan signing an exclusive deal with Spotify, both Ben Thompson and Jon Gruber mentioned Howard Stern in their analysis.

Gruber, assuming Joe Rogan was making between $64mm-$240mm per year from his podcast wrote –

However much Howard Stern was getting underpaid by Sirius six months ago, it’s even more so now.

Since Joe Rogan’s multi-year deal with Spotify is being estimated in the ~$100mm range, the $64mm-$240mm estimate is most likely inflated.

Howard Stern’s deal with Sirius has long been estimated to be $100mm per year. Howard will get more in his next contract but to call him underpaid is an exaggeration. He is the highest-paid radio/podcast broadcaster in the world, by a large margin.

Ben Thompson wrote –

Lots of folks have drawn a comparison between Spotify’s deal with Rogan and the one Sirius made with Howard Stern back in the 2000s. The latter, though, required Stern fans to actually buy hardware and pay for a subscription service; it’s a testament to Stern’s popularity that this actually worked, and also a great sign for Spotify. After all, the company isn’t asking Rogan fans to buy a new phone, or even pay any money at all: the fact Spotify’s goal is first and foremost advertising means the cost imposed on users is simply switching to an app they have probably already downloaded.
It is Luminary that is a better analogy to Sirius: no, you didn’t need new hardware, but you did need to download a new app and pay money; without a singular star like Stern, the idea was doomed from the beginning (in fact, even with, say, Rogan, Luminary would have still had no chance: Rogan, unlike Stern in 2004, could already go direct to consumers, which would have given him leverage to take all of Luminary’s profits, were they ever to exist). I’m honestly baffled the company managed to raise more money no matter the terms.

Ben highlights that Howard has been a success with Sirius despite the incredible uphill battle of friction his listeners endured. This is why Howard is, and will continue to be, the highest paid broadcaster in the world.

The question is, where does Howard go at the end of the year when his contract is up?

Howard’s options are –

Retire
Go independent
Go to Apple
Go to Spotify
Stay at Sirius

Does he retire? No. Howard’s price will be as high as ever, he’s in good health, and he’s good at what he does.

Will he create an independent podcast? Although he’s in good health, he’s 66yo. He’s scaled back his show to 100 a year. It’s unlikely Howard wants to take on the overhead of hiring staff, building studios, and selling ads.

Will he go to Apple? Apple is slowly but surely losing market share of podcast control to Spotify. An exclusive deal with Apple, which is a paid-only service, makes sense for both parties and get Howard a tremendous payday. Howard does not live a lavish lifestyle but he is competitive and views being paid the highest as validation that he is the best broadcaster alive.

Will he to go Spotify? Although Howard increased his pay, he lost total listeners when he went from radio to Sirius, which has a paid-only model. What’s appealing about this option to Howard is that he can get the payday he deserves while expanding his reach through Spotify’s free tier, increasing his relevance.

Howard would not want to go exactly the Joe Rogan route. Howard would want to be a Spotify employee and have Spotify build and maintain his studios, pay his staff, and sell his ads. Spotify has an advantage over Apple, having a major office in NYC, Howard’s home.

Finally, Howard may choose to stay at Sirius. Sirius has proven they are valuable partners to Howard and can continue to make him the highest-paid broadcaster in the world. They won’t be able to match an offer from Apple or Spotify but will they offer him enough that moving to another employer isn’t worth it? Howard has been with them for 15 years, he has his studio, his staff, and his show is running like a fine-tuned machine.

At 66yo, I expect him to stick with the familiar and stay at Sirius. But I hope he goes to Apple or Spotify.

I’m Back

Posted on May 20, 2020 by mikejsiegel

After a nine-month hiatus, I’m itching to start writing again.

Instead of monthly long-form 500ish word take on biz&tech, I’m switching it up.

Going forward, posts will be takes on takes. Shorter, more frequent posts on takes by people like Ben Thompson, John Gruber, MG Siegler, and publications like TechCrunch and The Verge.

SnApple – Apple should buy Snap

Posted on September 25, 2019September 30, 2019 by mikejsiegel

It feels like if Apple wasn’t so wedded to their own legacy branding — more on that in a bit — they would rename this thing the iCamera.
MG Siegler https://500ish.com/apples-boar-on-the-floor-mistake-ad99ec8e494a

The case for Apple to buy Snap

After watching the iPhone 11 event, it’s clear that the iPhone’s most compelling innovation has been with the camera. iPhone is no longer a phone first but a camera.

This is where the similarities between Apple and Snap begin. Although the public perceives Snap as a social network, Snap fancies itself a camera company. Apple can make the claim they make the best smartphone camera in the world. Snap can make the claim they make the best product that leverages a camera in the world.

It’s undeniable that both are obsessed with cameras.

For the past couple of iPhone events, software features to utilize the new camera’s abilities have become a focal point of the event. In 2018, it was animojis and this year it was slofies.

These features are fun but they pale in comparison to what Snap has done.

April 2011 – Snap makes the first popular ephemeral messaging platform. Snap also popularizes opening an app directly to the camera and vertical videos
October 2013 – Snap launches Stories
August 2014 – Snap launches geofilters
January 2015 – Snap launches Lenses
July 2016 – Snap acquires and debuts Bitmojis
May 2019 – Snap launches gender swap lense
September 2019 – Snap launches 3D camera effect

Evan and company have been busy. Over the last eight years, Evan has launched over six major hits that have been quickly copied by rivals. Evan has an uncanny intuition in how a person will interact with a camera.

Imitation is the sincerest form of flattery. Evan’s special talent for creating a product that takes advantage of the unique capabilities of a smartphone and its camera has been validated. Not only does Snapchat have over 203 million DAUs but many, most obviously being Instagram, have copied Snap’s features relentlessly.

Snap’s latest feature is a 3D camera which a user must have an iPhone X or later to leverage. This is an example of Evan not only taking advantage of the smartphone camera but quickly taking advantage of new features that are added to the camera

Privacy & Design

Apple and Snap share numerous core values. Apple prides itself deeply with being respectful and mindful about privacy, as does Snap.

Apple and Snap are design-first. Steve Jobs worked hand-in-hand with lead designer Jony Ivey for years. Likewise, Evan is known to work directly with the product designers at Snap to ensure the design is first-class.

Apple can afford it

Snap’s market cap sits at $23B as of this writing. Apple has over $200B cash on hand. Apple’s largest acquisition so far has been Beats Electronics in August 2014 for $3 billion. The ~ $25B price tag will be the biggest investment they’ve had but Apple can pull it off.

Apple has gone Hollywood

With the introduction of Apple TV+ and Apple entering the original content game, Apple has entered Hollywood in a big way. Snap is one of the largest players in the LA tech scene. Snap has accumulated incredible talent, have cut many content deals of their own and can be a major asset to Apple’s Hollywood aspirations.

Apple lacks a Product thought leader

With Jony Ivey leaving the company and Steve Jobs long gone, Apple no longer has a recognizable product thought leader. Although Tim Cook is a genius with logistics he is not the charismatic product leader and presenter that Apple lacks. This is a lofty claim, but Evan Spiegel is the perfect heir apparent to Steve Jobs.

Why it won’t work

There are many reasons Apple buying Snap may not work.

First, can it get done? Would the government, which has become wary of “big tech”, allow Apple to own a successful social network? Although this is a risk, with Facebook and Instagram’s domination, it would be hard for the government to make a case that this acquisition would lead to monopoly power.

Second, would Evan sell? Google offered Evan $30B in May 2016 and he said no. Although Evan fiercely wants to remain independent, a relationship with Apple would be hard for him to pass up. Apple is a better value fit for Evan and can accelerate his mission of Snap.

Third, Snap makes most of its revenue through ads. Although Apple sells ads such as placement in the App Store, Apple regularly slams companies whose primary revenue comes from targeted ads.

Apple could look at other business models for Snap. Perhaps Snap being tightly integrated with the iPhone will help Apple sell more iPhones and therefore Apple can avoid the Ad revenue. Or, perhaps this is an opportunity for Apple to diversify its revenue even more.

Bottom Line

Apple and Snap share the same values and could produce killers products together. Allowing Evan to have access to the camera months or years before it launches and letting him create a more integrated product is a dream. But that’s just the start. Giving Evan’s genius product mind access to Apple’s vast resources is a match made in heaven. What innovations could Evan add to iOS? What other areas of Apple could he make an impact?

Apple is perhaps the best business in the world. Apple has top of the line products, amazing logistics, and an incredible brand. But it lacks soul if you ask me. It’s easy to criticize Snap, but Snap has soul.

Rooting for Peak Facebook

Posted on August 14, 2019September 9, 2019 by mikejsiegel

Peak predictions are tempting. Peak Oil has been an on-going prediction since at least the 60s, yet here we are in 2019 and have yet to reach peak oil.

In tech, peak Apple has been everyone’s favorite (incorrect) prediction.

Facebook is the newest peak-predicting victim.

MG Siegler has been a fan of predicting Facebook’s demise. The first such prediction he made in 2015, but he’s made others, going as far as penning a post called “Peak Facebook” a year ago.

Here is his latest take, writing about “Instagram by Facebook” –

The first thing that jumps to mind: Facebook is dead. Long live Facebook!
This is pretty clearly a way to cheat death (eventually). Or, at the very least, to hedge against it. It’s a lot harder to have a narrative around the “decline of Facebook” when Instagram by Facebook and WhatsApp by Facebook are thriving. (Not to mention that it would seem to be an attempt to solidify the “they can’t be broken apart” narrative…)

But there is a very real downside risk here. As the article notes, many people don’t know that Instagram is owned by Facebook. If and when they now know, does that change their usage at all? Even I — obviously very aware who Instagram is owned by — find myself questioning if this will or should change my usage. I mean, it’s just a name change! But it’s also a clear signal of the way forward..

First, let’s look at the facts. Facebook added 25 million DAUs last quarter for a total of 1.587 billion daily users. That’s insane and obviously objectively not peak Facebook. The fine print shows that these numbers do not include WhatsApp or Instagram, this is the big blue app.

Since MG’s first peak prediction in 2015, Facebook has added a whopping 500 million DAUs! 50% growth from their 1 billion at the time in 2015. Amazing, and shows how foolish MG’s prediction was at the time.

MG is missing another detail with his latest critique. Facebook is not outright saying why they are changing Instagram and WhatsApp to “Instagram by Facebook” and “WhatsApp by Facebook”. The detractors like to accuse Zuckerberg of being vain. There is a rumor going around he’s “annoyed” that he isn’t getting credit for their success.

This seems wildly out of character for how Zuckerberg has acted in the public to date. If anything, Zuckerberg would love to be more under the radar than the intense scrutiny his company receives.

What is more likely is that this change is due to pressure from regulators, most likely European regulators. The regulators feel Facebook is tricking people by not being more upfront about owning these apps. Facebook is getting ahead of this critique by becoming more transparent about their ownership.

And this sums up Facebook’s current can’t-win situation. Damned if they do, damned if they don’t.

Tumblr <> WordPress

Posted on August 13, 2019August 13, 2019 by mikejsiegel

Tumblr was purchased six years ago by Yahoo for $1.1B. Verizon sold it yesterday to Automattic (parent of WordPress) for a (rumored) $3 million.

A couple of thoughts on this –

I’m still unsure of what NYC’s best tech success story is. Tumblr does not appear to be it

I’m delighted to announce that we’ve reached an agreement to acquire Tumblr!
We promise not to screw it up.
– Marissa Mayer, Yahoo, 2013
https://yahoo.tumblr.com/post/50902111638/tumblr-yahoo

Marissa Mayer did not live up to her quote here. CEOs are paid to make big, bold moves. A CEO should never promise an acquisition will remain independent (spoiler alert, it won’t) or that they won’t screw it up. They may screw it up, they will PROBABLY screw it up, they’re taking a chance, especially when the business isn’t profitable.
Automattic is Tumblr’s perfect home. At 3 million bucks, it doesn’t have to bend its back (and comprise the product) to make their money back. Automattic is king of the blogging game.
My two cents – stop being a puritan and bring the porn back. Don’t sell ads, empower bloggers (and porn bloggers) to make money via subscriptions. Make Tumblr a player in the newsletter game.

Zooming IPO

Posted on April 30, 2019 by mikejsiegel

Three years ago I wrote about Atlassian’s IPO and called them the B2B gold standard. Move over Atlassian, there is a new B2B gold standard in town and its name is Zoom.

When I evaluate a public company I consider investing in I look at six main attributes.

How much do I love the product?
How good is leadership?
How expensive is the stock compared to earnings? (Price to Earnings ratio)
How much cash does the company have to invest and/or survive a rough spot?
How much potential does the company have? What is their Total Addressable Market (TAM)? What other products can they create?
How many competitors does the company have? What is the regulatory environment?

Product Love

It was love at first sight with Zoom. I was invited to a meeting on a sales call. I had never heard of Zoom and was annoyed I had to install yet another video conferencing software. But, after a seamless download, I was impressed. Not dealing with a browser extension like WebEx or clunky software like GoToMeeting, Zoom just worked. Right away. The screen sharing also worked flawlessly. And, this is where I became hooked. It wasn’t that Zoom did more, but it did everything without crashes or hassle.

I’ve worked at three startups and all three of them use Zoom. They use Zoom for nearly everything – internal meetings, sales calls, customer calls, large company-wide meetings and more. Although it’s rare to truly love video conferencing software, it became clear to me that people had fewer issues when using Zoom compared to the alternatives.

Zoom started popping up in my life in other places as well. I’ve been invited to webinars on Zoom. I’ve been invited to groups on Zoom. Day traders use Zoom and charge people to watch them work trade during the day. Zoom is starting to grow a life outside the traditional B2B environment.

Furthermore, my product love for Zoom is backed up by more objective measures. G2 Zoom customer ratings are 4.5/5 which is higher than the 4.2 WebEx, GoToMeeting and Skype Business have. Gartner also has data that shows the Zoom product is at the top of the pack.

The “just works” mentality along with the viral nature of Zoom makes the product top notch.

Leadership

Eric Yuan is the founder and CEO of Zoom. Eric is the archetype of my favorite tech founder – hard working, technical background, unique knowledge with the ability to delay gratification.

Eric is an immigrant from China with degrees in applied mathematics and computer science.

Eric is also a former early employee of video conferencing software WebEx, which was sold to Cisco. Eric’s experience at WebEx gives him an intimate knowledge of video conferencing.

Eric has shown an ability to delay gratification. Most recently, he was criticized about leaving money on the table during the IPO and had this in response to that criticism

“When we started our company, every time we did funding rounds we left money on the table because those are our business partners. When you are trying to win, you also want your partners to win. If you lose, you lose more than your partner. So our business philosophy is always to care about our partners,” Yuan told Yahoo Finance.
“To leave money on the table is always a good thing,” Yuan added.
https://finance.yahoo.com/news/why-zoom-ceo-says-leaving-money-on-the-table-is-a-good-idea-stock-closed-up-72-in-its-debut-134047060.html

For a buy-and-hold investor like myself, it’s important to look for leaders that are thinking in the long-term.

Potential and Macro View

Despite being the most loved product in the video conferencing space, Zoom only has 10% of market share, coming in third behind GoToMeeting and WebEx.

With a low market share, Zoom has a lot of space to grow. Furthermore, as distributed teams become more commonplace, so does the need for video conferencing, which means Zoom is in a growing market. Going public will give Zoom more credibility among the Fortune 1000 which will help it steal business from the incumbents. The competition (WebEx, GoToMeeting) is held back by technical debt. The fact that Zoom was built from the ground up with reliability, ease of use and integrations in mind makes it much more resilient to the existing competition.

Cash and Price Earnings Ratio

Zoom has plenty of cash. Going into the IPO, Zoom had $275 million in assets. The IPO raised another $751 million which gives Zoom money for R&D, acquisitions and/or a rainy day.

The bad news is, I’m not the only one who noticed that Zoom is a hell of a company. Many investors saw the great product, strong leader, and the great potential of Zoom and snapped up the shares quickly, making the IPO pop over 70% on the first day. As of this writing, Zoom has a staggering market cap of $18 billion on earnings of $6 million in 2018. That results in a sky high PE of 2800. For comparison, Salesforce has a PE of 115 and other tech companies hover around a PE of 15-30.

But, everything is relative. Many SaaS companies are burning cash and using their revenue growth to justify this strategy. I prefer to buy stocks of companies printing profit and therefore look at $ZM as a high priced stock.

Bottom Line

Zoom is an excellent company with a stellar product. I expect it to be around for a long time and to improve its offerings. I currently find the stock too expensive for my taste. But, I will keep an eye on it to see if the excitement of the IPO wears off and the price of the stock comes back down to earth.

Aggregating Apple

Posted on March 31, 2019 by mikejsiegel

On Monday, Apple announced three new services. Apple News+, TV+ and Apple Arcade. These three services follow the mold of Apple Music. Apple is taking content from many different providers, aggregating it into one service, and selling it to users as a monthly subscription.

Each of these services aggregate content providers into a nice package to entertain users for a low price. Apple is not reinventing the wheel with any of these services as Netflix, Spotify, etc have established a playbook on aggregating content.

Strategic Advantages

When Apple began entering the services industry they started off with iCloud. iCloud made sense for Apple as it extended the capabilities of the iPhone, iPad, and Mac. As Apple continues to evolve into a services company, there are many ways they could go. Apple could create a gmail-like service or a search engine, but neither would take advantage of Apple’s unique position.

Apple News+, TV+, Arcade, and Music are leveraging many of Apple’s core competencies. Apple is leveraging its distribution advantage, its cash advantage, and its brand to create services that will generate high margins.

Apple’s distribution advantage starts with its 1.4 billion active iOS devices. For years, Apple was content with the revenue and high profit of selling the iOS devices itself but, starting with Apple Music, Apple is now taking advantage of this incredible reach. All of these services will most likely exist as default apps on each iOS device, they’ll each have trial periods and you’ll easily be able to sign up for each service through the credit card on the app store or your apple pay card.

Apple, unlike other potential service providers, is not limited to App Store rules or the iOS public SDK. For example, Apple can take advantage of its full access of iOS to create a superior online/offline experience with Apple Arcade.

Although Apple controls a lot of demand, it needs more than that to pull off these services effectively. Apple’s cash hoard allows it to spend liberally to create its own content to augment the TV+ experience. As Netflix has shown, having unique content is key to acquiring and retaining customers to a TV service.

Apple also has one of the best brands in the world. Stars like Oprah and Steven Spielberg, publishers like People and WSJ, music labels and game developers are lining up to be associated with Apple.

Improving the Strategy

As Google and Amazon have learned, making your services available everywhere is key to success. Apple has taken this approach with Apple Music (available on Android) and Apple TV+ (available on many TVs). However, as of now, Apple News+ and Apple Arcade are exclusive to iOS. This isn’t ideal. Apple created Apple News+ from its acquisition of Texture. Texture Android users were not thrilled to hear that Apple was shutting down Texture with no alternative for them. This may be due to not being able to get publishers and game developers on board.

Apple should continue to expand these services to other devices. Apple should increase its reach, aggregate more demand and therefore have more power over the content providers. This will allow them to attract more content and be able to negotiate better terms.

Apple’s Services Evolution

Posted on February 28, 2019 by mikejsiegel

Growing Services

As I wrote about last month, Apple continues to evolve into a company that provides (and makes money off of) services. Last quarter, Apple pulled in a total of $84.3 billion. Apple’s services generated $10.9 billion in revenue, up 19% from a year prior. Apple’s services revenue comprised 13% of their total revenue. Although Tim Cook touts Apple as a services company, and many of their most recent moves back that up, they have a long ways to go to diversify their hardware revenue, especially non-iPhone revenue.

Even more importantly, Apple reported its margin in the services category, coming in at 62.8%. Much higher than Apple’s overall margins of 38%. And this is why investors love services – low spend, high profits.

As you can see in the chart below, Apple’s services’ revenue is much more consistent than the cyclical iPhone revenue. As a long term investor, I’m not that concerned about this, but Wall Street loves this consistency.

Google, the App Store, and Lazy Money

Apple’s services’ revenue is growing quickly, it’s consistent, and its margins are thick. The bad news is the bulk of the services’ revenue is coming from lazy money.

WTF is lazy money? Well, in one way it’s good. It’s money you don’t work for. Google, for instance, makes up approximately 20% of Apple’s services revenue by paying Apple for placement in the Safari toolbar. This is great although does come at a cost to the user. Apple could, as they normally do, remain laser-focused on the user experience and choose the search engine that offers users the best UX. With Apple’s privacy focus, DuckDuckGo appears to be an obvious choice for Apple. Instead, Apple gives this real estate to the highest bidder, the not-so-privacy focused Google. I’ll get back to the privacy issue later.

Apple also makes lazy money through the app store. Apple charges 30% to app developers for the sale of an app and/or the first year of a subscription. Apple takes 15% annually from app subscription revenue after that. Some of this revenue is earned. Apple sets guidelines and vets app to protect their users. The App Store also allows users to search and discover apps easily and quickly. But some of this is rent-seeking, such as attempting to take 15% of ongoing revenue from Netflix subscriptions. Netflix has decided they will no longer allow users to subscribe through the app. Again, Apple is arguably sacrificing the UX in order to make lazy money.

SaaS Money

Apple Music and iCloud are more textbook services. With these services, users are signing up for monthly subscriptions that they pay for. These services are sticky. Once a user creates their playlists in Apple Music or gets all of their images/files into iCloud, they become entrenched. But, this isn’t easy money for Apple. Apple will have to continue to maintain and improve these services in order to keep their users.

News, TV, Gaming and More!

The Apple services rumor mill is hot. The Apple News service appears to be coming soon. A TV/Movie service after that and potentially a gaming service down the road.

Apple is leveraging its distribution advantage of the iPhone, iPad, and (to a much lesser extent) AppleTV to launch services. As mentioned last month, this is a sound, but risk-averse strategy.

Apple Privacy

Tim Cook has been harsh on the other tech giants when it comes to privacy. Taking many opportunities to bash Facebook, Google, and others that use the information they have about their user to serve targeted ads. Furthermore, and perhaps their most overstepping behavior, Apple has insisted that every app in the app store disclose when they are recording a user’s behavior.

Although I commend Apple’s respect for user privacy, this is an example of why it’s hard for companies to change what they do. Apple has made money selling computers in many different form factors, but creating a best-in-class service is much different. Good product managers of a service let’s data be their guidance. Every major website we interact with is tracking how their users use it, and this data is used to improve the UX. SaaS 101. Apple’s attempt to take a moral high road will result in inferior services. So far, unlike Apple devices, Apple has yet to make a service that is best in class. Apple Music, Apple Maps, etc may someday have more users than Spotify or Google Maps on iOS devices but that will mostly be because of the value of default apps, not because of a superior service.

Bottom Line

I’m open-minded. We’ll see if I have to eat crow on my assertion that Apple is incapable of making a best-in-class service without sacrificing some privacy. I suspect Apple will eventually start to track behavior to improve the UX and collect information to enhance personalization.

Either way, Apple will make money from these services and the services’ revenue will continue to make up a larger slice of their revenue pie.

Risk-Averse Apple

Posted on January 30, 2019 by mikejsiegel

Good Enough for Warren

Apple is a hell of a company. So much so, the greatest investor of all time, Warren Buffett, has nearly $40B worth of Apple stock through Berkshire Hathaway.

Apple has become the perfect Berkshire Hathaway investment. It has a solid brand that has lasted the test of time. It’s a profit machine, the most in the history of a public company. It’s sitting on a giant pile of cash ($130B) and it’s putting that cash to use the way Warren likes. Apple provides a healthy dividend, currently a 1.85% yield, and consistently buys shares back. Finally, Apple is giant, which means Warren can park a lot of cash in it.

That’s the good news, the bad news is Warren likes to invest in boring, risk-averse companies.

There are other signs that Apple isn’t pushing the envelope. Tim Cook has been beating the “Services” drum, indicating Apple is morphing into more of a services company. This is a nice safe bet for Apple. Leverage the massive success with devices as a way to push services and make easy money. Apple Music, which is a giant success, is exhibit A. Furthermore, Services are cheaper for Apple to create, easier to go to market, and less risky than hardware. If Apple has a flop with hardware, the critics will have a field day.

Apple seems hooked on “rent-seeking” activity. Taking an annual cut of Netflix subscriptions bought through the App Store, for example. This is the type of activity I expect from a more desperate company, not one that is focused on the long-term.

Watch and AirPods are huge successes. Each capitalized on Apple’s strengths, integration of hardware & software, and leveraged the success of the iPhone. Both were safe bets with relatively little friction.

Compare this to their original giant successes, the iPod and the iPhone. Those products also capitalized on Apple’s strength of integrating hardware & software but they were huge risks. They both required Apple to change the industries they entered. With the iPod, Apple was able to convince music labels to sell music via iTunes. With the iPhone, Apple convinced the carriers (only AT&T at first) to leave their bloatware off and to give Apple complete control of the user experience. These products had major friction to overcome, both were big risks, and both become massive successes.

R&D Spending

The good news is, as revenue has grown, so has Apple’s R&D spending, but they trail the Googles and Amazons of the world in this (with the percent of revenue)

“Speaking before this week’s results, he said Bernstein estimated that Apple spent 5.1 percent of its revenue on R&D which is less than its rivals. “Apple could double its R&D and be relatively inline with peers”.”

Amazon and Google

It’s not just the spending that makes me think Apple isn’t taking as many risks as their peers. Google has their “moonshots” and Amazon enters every business imaginable. Buying Whole Foods is an example of Amazon taking a large risk.

As much as I want Apple to take a larger risk, I don’t think they should follow Google or Amazon’s playbook. My beef with the risks that these companies take is many of them are not leveraging their core competencies. Google’s moonshots have so far fallen flat and have not born fruit, despite the heavy investment.

Amazon has surprisingly been successful in areas outside their core competency (i.e. Alexa) but have had flops in areas they had no business being in (i.e. Fire Phone)

Bigger Risks

So what type of risks would I like Apple to take? Apple should aim to develop a product with the following characteristics –

Requires the integration of software and hardware
Requires a significant change to an established industry
Requires a long R&D cycle to pull off
Is within a product category where Apple can make THE premium product
Has major profit potential ($5B+ / quarter)

Televisions, the only major screen people use that Apple doesn’t have a product in, is the first obvious choice, as many have written about before. Television is in the middle of a transformation, with cable subscribers shrinking (although slowly) and streaming services growing. Although streaming is growing their overall offerings fall far short of traditional cable.

Automobiles are the second obvious choice. Cars are becoming more and more reliant on software as automated driving becomes more mainstream. This may be a perfect time for Apple to pounce. Manufacturing a car, at scale, is no joke, as Elon Musk can tell you. This move would be orders of magnitude riskier than a TV but with higher profit potential.

Bottom Line

Apple is secretive with their R&D efforts. There is a good chance Apple looks risk-averse on the outside but is indeed working on products that are high-risk.

Apple’s current strategy is rock solid. It’s a little too safe for my taste, but growing services and making more peripherals to the iPhone can easily get Apple well above the height of their previous trillion dollar market cap.

We’re still a long ways away from peak apple, but as a consumer, I hope they swing for the fences.

To Buy Spotify?

Posted on December 31, 2018 by mikejsiegel

To buy Spotify or not to buy?

One one hand, it meets my general criteria for buying stock well. Here are my current individual holdings and my rubric for determining if a stock is worth the risk. SPOT compares well to my other holdings.

My Love

I use Spotify every day and have so for years now. It’s a part of my everyday life and has improved it. Spotify is easily worth the $9.99/month.

Leadership

Daniel Ek, the founder and CEO of Spotify, has shown great leadership (and I prefer founder-led companies). Daniel is product and tech first. Daniel has done a great job delaying gratification and continues to invest in the long-term.

PE

This is the biggest drawback. I prefer to invest in companies that make a profit.

Cash

Spotify isn’t quite making a profit yet but their cash burn is controlled and they are close to sustained profitability. The hoard of cash left over now should begin to grow and allow Spotify to acquire.

Potential

Considering the total addressable market of the entire world, Spotify’s potential is the sky. That being said, Spotify doesn’t have a 10 in this category because of its marginal costs.

Spotify’s potential is is close but not quite like Google, Netflix or Facebook because Spotify is not a complete aggregator.

What is an Aggregator?

As Ben Thompson defines it, an aggregator has the following characteristics –

Direct Relationship with Users
Zero Marginal Costs For Serving Users
Demand-driven Multi-sided Networks with Decreasing Acquisition Costs

Unfortunately, Spotify doesn’t qualify as an aggregator as defined here. Spotify’s marginal costs for serving users music is around 52% per song.

Spotify is well aware of this and is working effectively to reduce marginal costs. As Spotify’s influence grows they gain leverage with the three major record labels. But more importantly, the marginal costs can be significantly lowered by signing deals directly with artists, as they have started to do.

But music is unique. Unlike news articles and TV, the backlog of music is as much, if not more, important than the new music. This gives the record labels a stronger position with negotiations and, at least currently, limits Spotify’s gross margin.

Macro View – Competitors

You don’t have to be an aggregator to be a great business but Spotify has other existential threats. Daniel Ek wasn’t the only person who recognizes how big this streaming opportunity is.

All of the big dogs are in the game. Apple, Google, and Amazon. And many smaller but unique threats – Sirius, Tidal, iHeartRadio, and Soundcloud.

Apple, Google, and Amazon all have deep pockets and distribution methods for their streaming services.

Apple distributes Apple Music by pre-installing it on every iPhone it sells. Pre-installed apps have a leg up over many competitors simply due to the friction of downloading another app. Google and Amazon have numerous ways to distribute their streaming services, with their hit smart speakers being their most successful.

The others all bring something unique to the game as well. Sirius has much more original content, a more radio-like experience, and has a solid car distribution strategy. Soundcloud is doing a great job capturing the young, upcoming artists.

Focus

As of now, despite my bullishness, I’m standing on the sidelines with buying $SPOT. The waters are too bloody for me, too much competition with too many threats.

But that may change. Unlike Apple, Amazon and Google, Spotify is not a small side product for Daniel Ek and company. Spotify’s greatest strength against these top dogs is to stay laser beam focused on creating the best streaming music experience for listeners and creators.

If Spotify continues that mission while getting their marginal costs down through leverage with record labels and signing artists directly, I’ll start piling up the stock.