Sunday Snapshots (17th November, 2019)
Stubborn Attachments, Grubhub's problems, Google's investments, and Smoke and Mirrors
Hey everyone,
It’s been a long week and now that winter is in full swing in the US, things can get a little gloomy. So before we get into this issues of Snapshots, here’s a photo of baby Yoda to cheer you up:
This week, I want to talk about:
Stubborn Attachments by Tyler Cowen
Why Grubhub pointed out flaws in its own business model?
How Google is hedging against anti-trust efforts
Why do we need symbols in our lives?
And more!
Book of the week
This week, I read Tyler Cowen’s Stubborn Attachments. It’s a bit more philosophical than the other books I feature on this newsletter, but one of my personal goals is to think more abstractly since it’s something that I’m not very good at. Here were my main takeaways from the book:
Optimize for growth: Tyler’s claim is that economic growth can solve most problems for most people. Even though the common criticism here is that the ‘progress at all cost’ policy can be diametrically opposed to human wellbeing, empirical evidence suggests that they usually ride on its coattails. I do think that there are real issues with this analysis. For example, economic inequality within nations is increasing because economic inequality between nations is decreasing. But his larger point is correct.
Fight for principles: Tyler believes that the only constraint on maximizing economic growth should be human rights. According to him, this is the hill to die on.
Future stakeholders: Humans are bad at making decisions about the future. With climate change and other issues that we will pass on to our descendants, this becomes dangerous. Tyler wants us to over-index on the impact of our decisions on future stakeholders. I wish he had more of a policy prescription here. To what extent should we think about our kids vs. ourselves?
My reactions to the book fluctuated between “yes, of course” and “I think there are 2-3 steps missing in this argument.” I think that is because it deals with the most important questions like how should we make decisions individually and as a collective? I don’t expect there to be easy, clear-cut answers. Tyler does a great job putting a line in the sand and giving us a framework to slot information into. The question is whether it is the right framework to use.
If you enjoy thinking about these ideas, pick up a copy of the book.
Long read of the week
Grubhub Q3 2019 Shareholder Letter
Grubhub is facing problems related to unit economics and market share. The CEO and CFO wrote a great shareholder letter outlining their current issues and future outlook. I saw three main factors at play:
Platform loyalty: It’s simply too easy for customers to shop around on different apps. If they don’t like the price on Grubhub, they can order from UberEats or DoorDash or Caviar or Postmates. This not only leads to lost revenue in the short term, but also builds an incomplete profile of the customer. Just because you’re ordering 3 times a month on Grubhub doesn’t mean that’s your demand – you might simply be ordering on other platforms. This makes targeting promotions on different customer segment inaccurate.
Brands: One of the ways to fix the platform loyalty problem is to have deals with large restaurants chains to be exclusive on your platform. Since customers are loyal to these chains, you have effectively outsourced the job of building loyalty to them. All the companies in this space are doing some version of this.
Playbook for questions: My main profitability thesis on food delivery apps is one that includes Wall Street becoming tired of losses for one of them. Since these groups tend to demonstrate groupthink, all other investors in all other food delivery apps will also push their companies to push for profitability. I’m aware of the game theory implications – if someone raises prices, you have an opportunity to undercut them and gain market share. So these pushes for profitability would need to happen in tandem with each other. What this letter does is provide a questionnaire for investors in these companies. Investors are going to go back and ask questions about platform loyalty and brands. Grubhub might be able to catalyst a push for profitability through this letter.
This is a fast moving industry where there are no clear winners but the chaos provides an opportunity for massive profits. A space to pay very close attention to in the next two years as everything shakes out.
Business move of the week
Next in Google’s Quest for Consumer Dominance: Banking
Google to Buy Fitbit, Amping Up Wearables Race
Stadia is Google's new streaming service for games
Alphabet (Google’s parent company) has had a busy few weeks. At its heart, the search giant is an advertising company since ads account for more than 70% of total revenue. It has perfect product-market fit – you literally type in what you’re interested in! So everything it does should be aligned towards that one North Star.
But it seems that the company wants to hedge against anti-trust blows to its cash cow.
In the last few weeks, it has made moves in three distinct industries – finance, health & fitness, and gaming. While folks have already analyzed these in isolation, I want to think about the broader strategy going on inside Sundar Pichai’s head.
To do so, I want to look at another company that made adjacent moves outside its core competency – Apple. In the last year, it has released a streaming service (Apple TV+), a gaming service (Apple Arcade), and a credit card (Apple Card).
Why?
There is an idea called growth loops that exists to answer the question:
Loops are closed systems where the inputs through some process generates more of an output that can be reinvested in the input. There are growth loops that serve different value creation including new users, returning users, defensibility, or efficiency.
In Apple’s case, the growth loop is easy to understand. Apple used to be seen as a luxury brand with the iPhone as its core product. The iPhone has about 40% market share in the US smartphone industry – that’s not a luxury product penetration. So, the game plan as changed. You increase the number of people on the iOS platform and increase the lifetime value of each customer by selling them services on a subscription model. The recent price cut on the base iPhone 11 from $749 to $699 is in line with this theory.
In Google’s case, I’m not sure what the loops are with these new products. There are two potential hypotheses that I can come up with:
Cash and TAM: Google has more than $100B in cash on hand. We’re at the top of the business cycle so companies are costly (even Warren Buffett says he can’t find good investments). Therefore, they are investing resources in markets with large Total Addressable Markets (TAM). Google investors have complained about cash reserves and want to get compensated. As a company oriented towards research and development, it famously shies away from either buybacks or dividends. The investments end up looking haphazard, maybe because they are.
Antitrust concerns: Regulation of technology is an easy topic to get behind these days in Washington. Google understands this and wants to diversify its identity. If it enters the finance, gaming, and healthcare industry, it has a lot of competition. They are no longer a monopoly! The company has a lot of market power in a specific domain of advertising – search ads. The strategy is that if it’s not a search ad company, it’s not dominant at all.
I’m really interested to see how this space evolves. Google has a lot of long shot projects (like quantum computing) that are exciting and are enabled by its search ad profits. I don’t want to see them go away. But the smoke and mirrors strategies might not work with political pressure ramping. To be fair, I don’t see any immediate threat to the company since the anti-trust framework in the US is not made for the Internet age. They will probably face more scrutiny in Europe and Australia.
Random corner of the week
Eugene Wei is one of the most original thinkers I’ve come across.
Where people see, Eugene observes.
He was one of the first business hires at Amazon and has since had stints at Hulu, Flipboard, and Oculus. His blog Remains of the Day is a must-read for anyone interested in tech.
I’m glad he applied his observation skills to an episode of The Crown, one of my favorite TV shows. The episode deals with the coronation of Queen Elizabeth II. At the French palace of the Duke of Windsor (the abdicated Edward VIII), one of his guests quips that the coronation with its archaic rituals and mystery is “crazy.” The Duke corrects him:
On the contrary. it's perfectly sane. Who wants transparency when you can have magic. Who wants prose when you can have poetry? Pull away the veil and what are you left with? An ordinary young woman of modest ability and little imagination. But wrap her up like this anoint her with oil, and hey, presto, what do you have?
A goddess.
Smoke and mirrors work. Narratives are powerful. The ordinary is made extraordinary and vice versa.
Meal of the week
This week, I went to Split-Rail for their “Ramen Lord Resurrected” event. While most famous for their fried chicken which I featured in the very first issue of Snapshots, every Monday they have a Ramen-themed menu. I had the Shoyu Ramen which was amazing. I highly recommend it if you’re in the West Town area.
That wraps up this week’s Sunday Snapshots. If you want to discuss any of the ideas mentioned above or have any books/papers/links you think would be interesting to share on a future edition of Sunday Snapshots, please reach out to me by replying to this email or sending me a direct message on Twitter at @sidharthajha.
Until next Sunday,
Sid